‘Growth is back, but there’s a confidence issue’

Aarati Krishnan | Updated on January 19, 2018 Published on January 03, 2016

People are not seeing an upsurge in demand and hence they are reluctant to build capacity, says the MD of Sundaram Finance

TT Srinivasaraghavan, Managing Director of Sundaram Finance, shares his candid views on a range of macro issues, from the lack of credit pick-up to the new, more elastic, base rates.

What has been the impact of the recent Chennai floods on your business and the CV sector?

It may be too early to say this as yet. But it has been over two weeks since the disaster and I don’t think the impact on our core business is very severe. Yes, vehicles did not ply properly in coastal Tamil Nadu for about 10 days and that will have a temporary cash flow impact. In an unfortunate way, the disposal of garbage and waste provided for additional freight movement. Then there is the likely reconstruction activity, which could actually give a fillip to the transport operators. Whether operators will acquire new trucks, it is hard to say. From what I hear from our insurance business, the damage to commercial vehicles in this deluge has not been as bad as for passenger cars.

On our insurance business, we have adequate re-insurance. I believe the net impact on our books will be quite modest, considering the magnitude of the calamity.

How has the growth in CV been this year?

There has been significant growth in the CV sector in the first eight months of this year in the medium and heavy commercial vehicles segment, with growth being upwards of 35 per cent. Our numbers reflect that completely. But to my mind, it is still not clear if this is broad-based and sustainable or if this is growth in select segments. I see CV demand in mining and coal, where some policy logjams have been cleared. I also see many fresh contracts being awarded by oil companies.

However, in areas such as coal and iron ore, the global commodities slump is a bit of a drag on performance. But personally, I tend to look for growth in the old-fashioned haulage segment, which deals with movement of white goods, brown goods, machinery, and so on. I am not yet sure that there is uniform growth in this sector. Where I do see improvements on the ground is in the power situation and in the availability of coal.

Today, there’s a lot of activism around diesel vehicles, pollution control measures and so on. Will tighter emission norms create more replacement demand for older trucks and CVs?

I think that Euro VI emission norms could get advanced, which is good from a pollution point of view. But my question would be, what would one do with all the 15-year old trucks? There are lakhs of them in India. If you take away these trucks as scrap, you will have to compensate the truck owner, for whom that run-down truck is the source of his livelihood. If you are going to ask him to buy a new Euro VI-compliant truck, he does not have the capital for it.

The government can give a subsidy; but a ₹50,000 subsidy cannot help him finance an entire truck. A ‘cash for clunkers’ kind of scheme may not be easy to implement in India. May be, we can have a halfway solution where some subsidy can be given and engines can be replaced, instead of replacing the entire truck. I believe that there is an economic angle to such issues and then there is a social angle. It is important to find the balance between the two.

What is your assessment of overall credit growth? It used to track nominal GDP, but is stuck in single digits at 8-9 per cent now.

I think the issue is one of a confidence deficit. People are not seeing an upsurge in demand and economic activity, and therefore, they are reluctant to build capacity. Yes, it is true that many of the macro indicators look great. The fiscal deficit is comfortable. Inflation is under control. There is more disposable income in the consumer’s pocket now compared to 12 months ago. For instance, your fuel expenses have gone down, which leaves you with higher spending power.

The other factor is that in this downturn, there have been very few job losses. Wage growth has remained quite high despite low inflation.

And yet the sentiment is muted on consumer spending. This is a conundrum. On credit growth, loans to small businesses are growing. But the mainstream corporate exposure is not really expanding. I find that most lenders would like to stay with short-term lending (12-month exposures) and are not ready to take on long-term commitments.

You have long argued against the base rate mechanism. Now that the RBI has proposed changes to it, what is your view on the new method?

Directionally, I welcome this change. I think the most important change is the introduction of tenor-linked base rates, which is eminently sensible. Earlier, you had the same base rate for a three-month loan or a five-year loan, which was untenable.

I also think the new system should make the base rates more flexible. If you look back over the last five-year rates, policy rates have swung quite sharply up and down but base rates have barely moved either way.

Hopefully, the new base rates will be far more elastic and move with the policy rates. I don’t know if they will fully reflect market driven rates. It also seems far more transparent because they are linking the rates directly to the cost of deposits. As deposit rates drop, this will hopefully reflect in base rates.

The lending business is also being opened up to a lot of new entrants, such as small banks, who will lend to smaller borrowers. So do you see competition increasing for NBFCs like yours?

When we looked at the rules for small banks, we saw two things that may potentially queer the pitch for them and those are the two conditionalities — at least 75 per cent of their loans should be to the priority sector and at least 50 per cent of the loans have to be below ₹25 lakh. Today, a single truck costs ₹25 lakh. That means if I finance one truck for a borrower, I cannot take any more exposure to him. Or say, if I finance three 10-tonner LCVs, that would exceed ₹25 lakh. I think the nomenclature of small banks is carefully thought out.

They are designed to occupy the space between microfinance institutions and NBFCs like us. That’s why, a majority of the entities that have bagged small bank licences, are MFIs.

For them, meeting these conditionalities is a done deal. Because of this, I don’t see such a huge threat from these small banks. I do see more competition from big banks, though, on retail financing.

Is your own loan book growing faster than the market?

Yes, our loan book has grown more than overall credit growth. However, the growth is more skewed than what I would have liked. We have grown significantly in CVs. But in the tractor segment, lending has really slowed. We have grown our book in LCVs and, to that extent, have bucked the trend. But that is a portfolio we have been looking to build in the last few years. It is happening only at a slow pace. In the cars segment, we have had to step back slightly. The yields are just not good enough.

In the construction equipment segment, we are doing well. Some infrastructure spending is starting to happen, at least in some states. Sentiment is buoyant in this space and this could become better in 2016. That is a bright spot.

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