It is a question of confidence more than anything else

Low business confidence, rather than high interest rates, seem to be deterring companies from expanding ambitiously and consumers from borrowing more, says Mr Praveen Kadle, MD & CEO, Tata Capital Limited. In this interview with Business Line Mr Kadle talks of how Tata Capital is carving a niche for itself in corporate finance and why this business will sustain even in a sluggish economy .

Excerpts from the interview:

Many NBFCs occupy a niche to deliver growth-used commercial vehicles, gold loans, and so on. Tata Capital seems to have a number of businesses in its kitty. What is the focus?

Tata Capital has two broad categories of customers — retail and corporate — and for each of these categories, Tata Capital wants to be a holistic solutions provider. Between the two segments, the corporate finance segment currently constitutes a larger part of our book.

We were one of the first movers in this segment. Within the corporate segment, we provide loans to fund working capital and capital expenditure, help corporates raise money through equity, debt and structured loans via our investment banking arm and help clients raise money from international markets through tie-ups. We also have an institutional broking and distribution arm.

How has the Tata connection helped?

A key advantage that helped Tata Capital build its presence in the corporate segment was the access to the Tata ecosystem. Tata companies are present across seven large segments, which, by and large, cover all major sectors of the Indian economy.

If the top 15 Tata companies have a large network of suppliers, channel partners, service providers and customers, Tata Capital offers its lending and business support services to this wide network, in addition to the large corporates.

Besides easy access, our relationships through the Tata ecosystem also help us understand and evaluate borrowers better, leading to lower risk and superior customised solutions. However, while the Tata relationship allows us access to the ecosystem, each of these businesses are converted on merit.

About 65 per cent of our loan book is from the corporate segment and 35 per cent is consumer-based. About 80-85 per cent of our loan book is secured. About 60-65 per cent of our corporate book would be from the Tata ecosystem.

Is the consumer finance business more resilient to a slowdown than corporate finance?

Not really. It depends on what products you finance and what customers you lend to. If you are in credit cards, consumer durables or low-ticket personal loans, it is relatively more risky. Overall, the financing business is a risky one and thorough due diligence of the customer is critical.

With interest rates going up, do you see deterioration in the debt servicing ability of your borrowers?

Interest cost for most corporates, including our clients, has gone up. However, many corporates have taken steps to reduce their overall costs. They have improved efficiency and, thus, while commodity prices have no doubt gone up, conversion factors have improved.

Superior working-capital management and more efficient use of capital has helped many companies report reasonably good results.

I am confident that these efforts undertaken by various companies will help see them through and not affect debt servicing considerably.

I do, however, see a general decline in business confidence. If a country grows at 7 per cent on a strong base, after many years of 8 per cent growth, that is not too bad. I am sure that it is possible for companies to make money at a 12-14 per cent interest rate; however companies are more cautious of expanding today. Having said that companies would always prefer better rates before they bet on capital expansion.

Why do you think companies are putting their investment plans on hold?

I think it is an issue of confidence more than anything else. Low confidence stemming from high inflation, market conditions dampens enthusiasm to expand capacity or put up new projects.

Even individuals looking to purchase a new home may postpone their purchases for a similar reason, even though he can still probably afford the current EMI

Large companies will require substantial finance even to sustain their normal operations. Capital expenditure may be sustenance, modernisation, maintenance or de-bottlenecking related.

If I am running a plant and can increase the output by putting in balancing equipment, I will certainly do that today. Similarly companies will always require working-capital funding.

When equity markets are down, family-owned businesses tend to restructure. That is happening today. That is another opportunity for NBFCs. In my opinion, there is sufficient profit potential in this business.

You have trebled your balance-sheet from 2009, but your profits are lower than NBFCs with similar size. Why?

What one needs to note is that these have also been our initial years when many of our businesses were in infancy and, thus, involved high set-up costs. We started out only in 2007-08. Immediately after the crisis, interest rates went up to 17-18 per cent, many NBFCs underperformed.

We maintained our track record of profitability. In 2009-10, we focussed on retail expansion, which again calls for heavy investment. We are confident of good performance this year and the years to come.

Would you consider accessing the NCD market for funds like other NBFCs are doing?

We were perhaps the first to do that in 2009 in difficult markets. Right now, interest rates are very high and likely to come down. Therefore, this is not a great time to raise money for the long term.

Further, the other costs of raising public money are also quite high. Therefore, we would like to look at doing this at the right time.

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