Mr. Dipak Gupta is an MBA from the Indian Institute of Management (IIM), Ahemdabad and is also a qualified electronic engineer. Mr. Gupta started his career with A. F. Ferguson and joined Kotak Mahindra Finance Ltd. (KMFL) in 1992 as Senior Manager, Corporate Finance. Thereafter he rose through the ranks to become CEO of Kotak Mahindra's Car Finance Division, Kotak Mahindra Primus Ltd. He has been Executive Director of KMFL since October 1999, heading the asset finance division of the group.
In an interview with Equitymaster.com Mr. Gupta spoke of the trend in the non-banking finance sector (NBFC) and the management's future business plans for the company.
EQM: What are the challenges, the NBFC sector currently faces with the increasing competition from foreign banks and financial institutions?
Mr. Dipak: In the past five years, NBFCs have been exposed to stiff competition from every business areas. Each product is facing challenges from different business segments. For example our commercial vehicle finance business is facing competition from banks and co-operative banks, for personal loans our competitors are multinational banks and for corporate loans, the competition is from nationalised banks & financial institutions. For investment banking and security business, large broking houses are our key competitors. The market is large enough and you have the share of that market. Apart from disadvantage of funding, actually there are no major hurdles being an NBFC. Today, the rate at which we borrow the funds is not more than 50 basis points than the rate at which FIs or MNC banks borrow.
EQM: What is your view on FDI norms for NBFCs?
Mr. Dipak: FDI investments, if it is in the form of equity then it can be of two types; one in the form of strategic investment and the other through stock itself. If it comes through stock investment than he has to be interested in all our businesses (through KMFL). At present we have three FDIs in our businesses. For the car finance business, we have FDI from Ford and it's a significantly large amount. For the investment banking we have reasonably large FDI from Goldman Sach' and for insurance business from OM Mutual, UK. But these FDIs are through join ventures. So the strategic investor puts money into these businesses directly and not into the parent company (KMFL). FDI into the main company is more related to the performance of that company rather than any roadblocks. Investor will judge the performance of a pure finance company and the returns that he expects from these investments, where probably you could lose against IT, media and banking FDI.
EQM: What is the current business mix of the company (FY01)? Going forward do you see the subsidiaries contributing higher proportion to total revenues?
Mr. Dipak: KMFL's consolidated business will give clear picture than KMFL as a holding company. For the holding company the business mix is quite diversified. Our major portion of revenues (35%) are from commercial vehicles, 15% from retail, 20% from corporate finance, 10% from capital markets and the balance from investments in subsidiaries and joint ventures. Subsidiaries are expected to account for major part of revenues in the next 3 years.
EQM: Do you see any pick up in car financing in the current year? What will drive the growth in the segment?
Mr. Dipak: The car financing market has slowed down and it can pick up only through consolidation (mergers and acquisitions). The market is shrinking and it is not expected to grow by more than 11% in the current year. Our share in the segment probably may grow but the market as such is not expected to show good growth rates.
EQM: How do you plan to compensate the loss of revenues by exiting the consumer finance business?
Mr. Dipak: Consumer financing in the first place was not contributing much to our total revenues in the past two years. Earlier we used to finance all kinds of consumer durables (loan for about 65% of the product value) and charge interest at the rate of around 30% per annum. However, our income was equal to the cost (administrative and legal) we incurred in financing the loan. If you default on such a small loan amount, it was not practically possible for us to take back the product (in return of loan amount). So it is as good as unsecured loan and we have finally decided to do away with this business and enter into personal loan segment, which is growing at comparatively faster rate.
EQM: Please throw some light on your foray into structured financing.
Mr. Dipak: We have entered into the structured financing two years back and it is a very profitable business. It contributes about 50% to total revenues of corporate finance business (10% of total revenues of KMFL). The risk in this business is low and the returns are high. Let me explain this business through a simple example. KMFL lends Rs 2.5 m to Hotel Leela, which has comparatively lower credit rating. My future cash flows are however secured, as I will lend against the credit card business of the company. So I will get the direct cash from card issuing companies like American Express or Citi Bank, which will be significantly higher than the amount lent by me. In this case if I receive the amount of Rs 5 m, I will deduct the principal and interest amount, and return the balance to Hotel Leela. Thus, practically speaking there is nil risk in the business. Although I am lending to a lower rated company, my future cash flows are secured from the high rated companies. The business has untapped opportunities and will continue to grow in future.
EQM: Please comment on the asset quality of KMFL?
Mr. Dipak: Today, our asset quality is one of the best in the industry (financial institutions or banks). Our net non-performing asset to advances ratio is just 1.4% (Rs 150 m NPAs), which is in line with the best in the industry. Also, our capital adequacy ratio at 35% indicates the financial strength of the company, which will allow us to expand our size in future. However, the higher CAR ratio is not necessarily a good sign because it shows that you are not fully leveraging your balance sheet size.
EQM: What kind of synergies the company is likely to derive with the merger of Pannier Trading?
Mr. Dipak: The merger of broking business of Pannier Trading is to the benefit of the company, as we will now have more cross-selling opportunities. (Kotak Securities is a 75% subsidiary of Pannier Trading and will consequently become a subsidiary of KMFL.). Currently we have around 150,000 customers, which are from different business areas - 75,000 from car finance, 125,000 from mutual funds and 25,000 from investment banking & broking business. We can have the opportunity to offer our financial products to this large customer base.
EQM: What is the current status of investments of Rs 590 m made in Fascel Ltd. in FY00 through wholly owned subsidiary Kotak Mahindra Investments (KMIL)?
Mr. Dipak: Our strategic investment in Fascel Ltd. has earned us good revenues. We have already sold investment worth Rs 390 m at profits of Rs 1.1 bn. These capital gains are tax free, being the investment in infrastructure project. We are not planning to bring back these in KMFL's books through dividend, as it will require the payment of dividend tax by KMIL. With the consolidated accounts, the profits are likely to get reflected in the financial performance of the holding company. So there is no point in reducing the capital gain amount by paying a dividend tax. As far as the utilization of these funds is concerned we will use it in our lending business through Kotak Mahindra Investment Ltd. so that we do not lose returns on the same by keeping the funds idle.
EQM: What are the likely benefits to KMFL in case it opts to convert itself into bank? Further, according to the guidelines the bank will not be allowed to extend credit facilities to promoters or group companies. How do you think it will affect KMFL's current business?
Mr. Dipak: Instead of converting into bank, we have applied to the RBI for setting up a 100% banking subsidiary. We will have many advantages in doing that. We can offer all our products through the bank and our large customer base probably could opt for our banking business, as they would be getting all services under one roof. The other major advantage is that currently I have to depend on others for banking requirements. Once I have my own bank, at least that business will remain under the main entity. Apart from these, we can offer project finance and corporate lending aggressively under the banking subsidiary. Even if the bank is not permitted to extend credit facilities to group companies, I can always transfer some of my (KMFL's) businesses to this subsidiary. For example vehicle financing and personal loans.
EQM: Any personalities that have influenced you the most?
Mr. Dipak: I am really impressed by Jack Welch, Narayan Murthy and Uday Kotak. Their ways of conducting business influences me a lot in my work.