L&T Finance will launch healthcare and education loan products in FY23: Dinanath Dubhashi, MD & CEO

Dinanath Dubhashi, Managing Director & CEO, L&T Finance Holdings Ltd, talks about Q2FY22 numbers, demand trends, disbursement, expansion & M&A plans, competition in the segment and outlook about where the company will stand in the next five years among others during an exclusive interview with Swati Khandelwal, Zee Business. Edited Excerpts:  

Q: Throw some light on the highlights of the second quarter numbers and what kind of demand trends were seen this time and how it has improved in this quarter?

A: I have always said that the last 18-months of the COVID have been very unusual months. The first six months were very bad, the next six months were very good and then again six months were bad. The first thing that we decided on this and was also supported by the board was that instead of focusing on the quarter-on-quarter numbers we will focus on building the strengths. These strengths will just not help us in successfully moving out of the COVID but will also help in the medium to long term growth and profitability growth. So, the first thing in it is business growth, business trends and if you will see - our overall AUM is negative but if you have a detailed look on it then our rural growth - which is our profitable product and we have been saying that over the next 5-10 years, it will be our area for concentration - has increased our market share and throughout in this our book growth has been positive.

If you will look at this quarter, in rural our tractor growth has been positive and we have maintained our market share in it, our growth has been positive in the two-wheelers. In fact, this quarter has been our best-ever second quarter in these two products. Apart from this, if you have a look at other two products, microloans and consumer loans, although microloans is an old product for us, we saw very less disbursement in it in Q1 and we started disbursement in Q2 and in September we reached Rs 900 crore, in fact, Rs 900-1,000 crore is our normal run rate. These were bolts for Q3 and Q4 because if we will make a disbursement of Rs 1,000 crores in every month of Q3 & Q4, then good growth will be reached. In the case of consumer loans - a new product for us and a fully digital native product - we have reached a run rate of Rs 500 crore in one quarter. So, good growth has been there in the rural areas but if you will look at the trend then Q3 & Q4 will be much better from here. This is the first headline.

The second headline, which is very important, is if you have a look at our collection efficiency then our collection efficiencies across products has reached the pre-COVID levels. This showcases our collection strengths and data analytic strength. The second thing that we have done is that the additional provisions in addition to GS3 and NPA provisions we have made it for Rs 1,750 crore. With this figure, we can confidently say that we have left a bad impact on the second quarter. The third thing is that our capital adequacy has reached 25%, which is quite healthy in fact more healthy than it should be. So, there should be more growth coming. So, if three things are taken together, i.e., the rural strengths and increase in trend; provisions, collections (collection at pre-COVID levels) and good provision levels to put COVID behind us and excellent capital adequacy, which can make sure that without raising any more equity we can grow well. After this, the last point is that in terms of profit, if you will have a sequential growth then from Q1 to Q2 our PAT growth stands at 26% and PBT growth stands at 34%. So, if you see a trend, Q2 results look very positive.

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Q: Is pent-up demand one of the reasons for high disbursement? In the last few quarters, you were a bit cautious in disbursements and do you think that this trend will continue in terms of disbursement? Also, update us about the asset quality and did you see any slippage and restructuring?

A: It is a good question and I will answer one by one to both. Firstly, about the pent-up demand, I think, a major part of the pent-up demand has ended in the second quarter. In the third quarter - I am talking about the industry - demand will be based on the economic fundamentals and I don't think so that there will be pent-up demand in the third quarter. Diwali is nearing and Dussehra has just passed off and we hope that Diwali will see some upsurge in demand especially in rural India. But there are two factors -

(i) As I said, pent-up demand doesn't seem quite high and if the growth is based on the economic fundamentals then it is a good thing.

(ii) Monsoon, while overall monsoon has been quite good but its distribution, if you have a look from June to September or the geographic distribution, I do not think that something very optimistic is about to happen. I think things will be moderated, however, there will be growth but a lot of runaway growth, i.e., rural areas will be on fire like the situation will not happen. I think it will remain moderate.

Under it, if we will look on to our strength, even in this situation, the tractor and two-wheelers growth of the industry was negative in the second quarter but we posted positive growth. We will maintain this growth and as I have said that two products, microloans - we hardly made any disbursements in May and June - in July and August it ran and in September, we attained a good run rate. Now, what it really means is Q3 and Q4 will be better than Q2. At the same time, consumer loans will also remain good. If you look in long term, not the next six months but the next two to three years, then we are also launching new products like we are launching SME and its pilot will happen in this quarter. We will gradually launch rural and products, which will go beyond tractors for the farmers to other products.

Also, we call it responsible consumption, i.e., we are starting with healthcare and education loans and these two things will be largely launched in FY23. So, it seems that the short term growth coming out of the existing products and more medium to long term growth is coming out from the launch of new products. You would have also seen a new trend the retailisation, which used to stand at 25% five years ago has reached to 47% now. I would not like to provide a short term estimate for the same but in the next five years, retailisation will lie somewhere between 60-70%. Obviously, retail being more profitable is important for the company's profitability.

Q: Do you have any merger and acquisition plans to strengthen your position?

A: You have asked a good question. So, what do we plan, when we plan we plan for organic growth and the sector/s in which we would like to grow. Inorganic growth cannot be planned, there should be opportunities, which means, you can plan that you will make three takeovers or so. But, we have planned about the sectors in which we have to grow and in the next three months, we will bring a detailed plan of the same in the market in which we will provide the details, just providing some snippets at present. I have talked about the focuses and based on the same, organic will depend more on our customer base as well as the knowledge, data analytics, among others. In terms of inorganic, the first thing we will concentrate on is on portfolio world. So, rather than M&A, taking over the companies, we will first concentrate on portfolios, as there are several NBFCs, which are not able to grow, there are FinTechs and we will first tie up with these and take a portfolio and as soon as we will feel that an opportunity is available at a reasonable value we will take it. And, our capital adequacy of 25% will help us to do that, we need not put more capital in taking that. As against the 15% required, we are at 25%.

Q: Competition is increasing in this space. Where do you see in the next two to five years and do you have any plan for the Group and the company and what is the field where you want to excel and lead? Also, how the mutual fund vertical is performing?

A: First I would like to answer your first question. Competition is definitely there but if you will have a look at the financing of the Indian retail population, especially in rural India, the penetration is quite low. I would like a small example of the two-wheeler market, of every 100 two-wheelers sold just 27-28 two-wheelers were funded three years back but today already 52 two-wheelers are being funded. So, the financers have increased the penetration by making efforts and convincing people. So, two things will happen (i) penetration will increase and (ii) opportunities will also increase. At this point in time, we welcome the competition because like many good players, responsible players will come into this market, the retail market of India will grow and expand and it is a need of the hour. Mr Nandan Nilekani once said that the Indian retail market is waiting for its WhatsApp movement and I believe that the WhatsApp movement is in the next five years.

In the case of retail, especially rural retail, I believe the market is going to expand vertically and exponentially for the next five to ten years and definitely, we will be there to take advantage. Our placement will be such that whatever we do even in rural will be completely technology-oriented. We will go digital throughout the product cycle and not just in acquisitions but acquisition, credit, loan servicing, repayments, collection, we will go via technology. We are trying to convert 100% of our process into technology. The new products that will be launched will be 100% digitally native, no paper will be involved in them. What it will do, first the turnaround time will be good and secondly, decision making is good, expenses are reduced and customer servicing improves. So, I will talk in detail about the plans around the next quarter but would like to inform you that the positioning we are thinking about is FinTech at Scale. So, we will behave like a FinTech but will also create a scale because I do not know of any FinTech that has created a balance sheet of at least Rs 2,000-3,000 crore and we will be a FinTech with about Rs 60,000-70,000 crore and that is the kind of the retail balance sheet and maybe in the next five years at Rs 1 lakh crore. So, that is the kind of positioning and ambition that we will have. Five years from now, life is going to be very very excited.