In an interview, Gunit Chadha, founder of APAC Financial Services (NBFC) and a former Asia Pacific CEO of Deutsche Bank, lays down the themes that he thinks will determine the future of the sector. Edited excerpts:
Do you think it is a good time to be in the NBFC space given the adverse liquidity conditions witnessed in the past few quarters?
After a decade of explosive growth, recent events are actually good—as it provides an opportunity for many NBFCs to re-assess their business models, ALM (asset liability management) strategies and tone down the leverage tonic.
That sounds familiar—something global banks have had to do, in the not so distant past. NBFCs should ideally cater to the under-banked and under-served segments of the market and there are enough and more such segments—both B2C (business-to-consumer) and B2B (business-to-business)—in a large country like India.
Notwithstanding recent events, for anyone with a medium- to long-term view, the NBFC opportunity is still very attractive. It’s not just in India, but globally. NBFCs, or shadow banking generically, play a significant role in many countries, and have acted as shock-absorbers when the banking system was constrained.
As NBFCs typically are non-deposit taking and have been well-regulated in India—with higher capital adequacy than banks, they typically cause no major systemic risks nor need bailouts by the taxpayers
As an NBFC, which are the areas you intended to focus on? So far, you have products for SME and affordable housing. Will there be more diversification?
APAC Financial is focussed on under-banked MSME (micro, small and medium enterprises) segments across India, including smaller cities and semi urban centres.
We are building a granular portfolio, addressing real customer needs across MSME segments, with both digital and physical branch models.
We have recently added a digital lending business to our portfolio. The first product launched by the Digital Lending vertical at APAC Financial is LAPR (Loan Against PoS receivables) to retailers and kirana stores. LAPR is a credit facility offered to merchants based on the card sales that happen on PoS (point of sale) machines installed at their outlets. APAC Financial has pilot launched this business in Mumbai and Delhi with a plan to enter new markets and enabling more MSMEs achieve their true business potential by availing much needed and timely financial assistance.
Even while the easiest place to deploy loans today would be to wholesale infrastructure borrowers or to the real-estate sector, APAC does no wholesale or real estate developer or builder financing, in either its NBFC or HFC.
For a new NBFC like yours, how difficult has it been to raise money from investors and from banks? Have you accessed any funding from banks?
Raising equity capital from institutional investors has been a very positive journey for APAC. To their credit, Multiples Alternate Asset Management Pvt. Ltd managed private equity invested in APAC post the break-out of the recent NBFC crises.
It provides good validation of our business model, and the fact that we chose to go to institutional should provide great comfort to follow-on equity investors.
While we don’t need to borrow right now, as we have conservatively not fully deployed our equity capital of circa ₹370 crore, we have in-principle borrowing sanctions in process with a few high-quality banks.
Many NBFCs are faced with a tough choice of valuation versus sustainable growth. Are you also faced with this dilemma?
Its great to have backing of quality investors. It’s equally a great responsibility. We don’t have a target time frame in mind to reach any particular market cap. Becoming a unicorn is not going to happen soon—it will, hopefully, at some stage of APAC’s long-term journey.
We will build our granular portfolio with strong risk-management, and in segments which provide fair returns to our shareholders without over-extending on leverage.
We believe that valuation will follow if we patiently build profitable businesses with innovation and execution excellence, best-in-class corporate governance and conservative risk management.
What is your total book size and what are your targets for growing it ?
It’s too early to discuss target book sizes. Asset under management (AUM) is not how we judge our success. We launched our business in mid-2108 and are under no pressure to chase AUM. We are still building our leadership teams and testing our front-to-back business models.
The MSME segments offer huge scope, with regulatory and government backing so why the rush to build aggressive “spray & pray” credit lending. Sustainable risk-adjusted returns, with fair practices towards customers, is what will build good companies.
Let’s not forget that we all must preserve the “fit and proper” reputation with regulators and not lose the “license to operate” with aggressive business models.