Edelweiss has a run rate of 35-40% growth. Do you think that kind of a run rate is here to stay for next three, four, five years despite the large base?
All of us have been very fortunate in the last 20 years. The growth that we have seen in Indian financial services — whether it is credit, asset management, wealth management, capital markets or insurance — has been phenomenal.
The average growth rate has been about 18%, the industry segments have grown at about 18% CAGR over the last 20 years. There has been a spate of reforms recently, including the Insolvency and Bankruptcy Code, GST, the entire Aadhaar-based technology, India Stack that has got developed which is going to make credit flow very easy. Given all these developments, I would assume that going forward the next 10-20 years, financial services in India should continue to grow at the same pace it has grown in the last 20 years, if not even faster than that.
The financial services sector as a whole looks very promising but of course this promise comes with a huge execution focus. Financial services is about cost, risk, people and technology. Firms which have got this right and we have many examples in India like HDFC Bank which over 25 years has built a marvellous institution.
We have been very fortunate and we are currently at that intermediate size where we are not very large, we are not very small and we just crossed about 10,000 people and our annualised run rate has crossed about Rs 1,000 crore so we are in the in-between stage. We have at least about 20-30 financial services companies which are bigger than us and hence I think the opportunity, the headroom for growth still appears to be there for all of us.
The businesses which have managed to grow are essentially on the lending side. Whether it is NBFCs or private banks, do you think now the growth may not lie with the lenders but rest with the managers? Whether it is the asset management business or the entire thesis of financial inclusion, if it grows higher, could the entire nature of financial services shift from lenders to managers?
It is both. There is a credit opportunity and there is what we call the capital markets opportunity. Until 2004-05, a large part of the credit growth happened with the corporate sector. Over last 8-10 years, housing finance has grown very well. But in the last three four years, SME credit has emerged as another big growth area. You must have seen the CIBIL report that came out today, which said that more than 150 million borrowers — SMEs and individual borrowers — are credit worthy but are still not getting access to credit.
So, even in the credit side, there is a fair amount of growth and SME and retail credit should continue to grow at 18-20% per annum for the next 10-15 years. There is going to be a host of opportunities on the credit side. But even the advisory side of the business which includes asset management, wealth management, capital markets and investment banking, has been growing fairly well over last 10 years.
Indian households are starting to borrow more on the credit side, taking home loans, car loans and education loans. All Indian households are also starting to look at their savings and how effectively that can be deployed. A few years ago, it was very easy to just buy gold or real estate or keep your savings at the bank. But now people are accessing equity markets, bond markets, mutual fund, insurance products and all of that. Alternative Investment Funds (AIFs) are growing very well. Indian households are getting fairly sophisticated both on their borrowing behaviour and their investing behaviour.
You are present in multiple lines of business like credit lending, wealth management, life insurance. Which segment of the business are you most bullish on or is it going to be a two-pronged, three-pronged strategy to take the business forward?
Historically, the aim has always been to build a broad-based diversified business and we have a portfolio of businesses. Some of them have scaled up very well, some are currently in the rapid growth phase. We always have three kinds of businesses, one are which have grown very well, one is in the rapid growth phase and the rest are in incubation phase.
For the coming three-four years, the business in the rapid growth phase is SME credit. Our wealth management business, alternative asset management business via AIFs and private credit where we are the leaders, are also growing very well. Historically, in the last few years, our housing finance business, ARC was growing very well,. Capital markets business also has grown very well now we are seeing significant growth. In the next few years, I would be fairly bullish on SME credit growth, our wealth management business and our alternative asset management business and eventually we will have insurance and agri credit business which after three-four years will start getting into the rapid growth phase.
We have a fairly good range of portfolio of businesses at all stages and we think there are a lot of exciting opportunities provided you can manage your risk and cost and your people and your clients very well.
Pricing right is also important because this is a competitive market. How do you look at building a moat around your businesses to stay relevant and perhaps have a competitive advantage?
In India we are very fortunate to have this growth opportunity ahead of us but everything is very competitive as well. We have some very smart companies, very smart entrepreneurs in India and I do not think any industry or any sector which has high growth potential will not have very high quality competition.
We face competition from both Indian companies as well as global financial services firms which are strongly present in India. The best way to manage competition is to first off all be close to your customers. We spend a lot of our effort understanding customer needs, understanding customer behaviour and tryig to align products and our customer experience.
This is easy to say and very hard to do but ultimately like any other business, historically financial services was a very product centric business but in the last 8-10 years, it has become very customer centric. So customer experience, customer centricity has to be the starting point and after that you manage technology and people to deliver this.
The biggest inputs you have now are your people and your technology and how do you merge your people and technology to create great products for your customers as per their needs and also deliver them with great customer experience. At the end of the day, financial services is fairly commoditised. A home loan is a home loan, a credit card is a credit card, a mutual fund is like any other mutual fund but you differentiate in terms of the performance, experience and in terms of the best pricing for that customer segment.
When you do all of that right, you create a moat and that is never permanent in this business, you have to renew it every quarter, every year because others copy. You also copy others. Financial services are hyper competitive and you have to constantly stay on your toes but I think if you listen to your customers and be close to the marketplace you can overcome this competitive issue.
NCLT cases are getting resolved and Edelweiss ARC business has a lot of exposure to some of these ARC assets. Because of NCLT, cases are getting solved. A case in point is Bhushan Steel. Hopefully, some more will follow by the end of the year. Do you get a significant uptick in your ARC business? How does this work?
I have always tried to avoid forward looking statements only the for the reason that the future is always very uncertain and we do not know how long it takes. A lot of cases are still in the bidding process. It is very unfair to give any concrete forward looking statement but I would say I am very positive with the way IBC process has been unfolding.
The legal challenges that we read about in the papers and what has been going back and forth is for real. On an average, about four to eight weeks have got added because of the legal challenges and the interpretation issues are around the law but on an average, the four to eight weeks have been well spent because first of all, the case law has got established.
There are a lot of interpretational issues on which NCLT have ruled, creating a case law for future cases. Along with that, the pricing has also improved because more competitiveness has come in and I would say there has been a 10% improvement in the prices that the banks and all of us are realising as a result of this competitive process.
On the whole, the timelines have got extended by four to eight weeks but the outcome has been more than positive and we expect to continue because half of the NPA cases were goods assets with weak management and the ones that our ARC focussed on most, were good quality assets because we have always believed that in India good quality assets will have a buyer, will always have a user and you can unlock value fairly easily.
Half of the NPA cases in the banking system were good assets with weak management, weak balance sheets and those are the ones that we are focussed on, a lot of those have been the ones that have gone NCLT and those are ones where we will see significant value unlocking.
We obviously have a fairly large book. We are leaders in ARC and the way ARC business model works is you get some fees and current yield while you acquire the assets but when you get the final payment on those assets, you get a small incentive and a carry that kicks in. If your realisation price is higher than the price at which you bought and we are hoping that most of the realisations in good quality assets should be higher than the prices at which they were acquired. So, there will be some future upside but it is uncertain.
We expect ARCs to grow in India. Over the last five years, ARCs have put in about Rs 30,000 crore of cash in distressed assets in all the ARCs put together. We have about 25% market share of that but, going forward, India needs about Rs 20,000-25,000 crore cash being invested every year. So, there is a huge opportunity going forward. , More than focussing on the past cases, the future growth opportunity also looks very exciting.