In a strategic move, L&T Finance, a prominent non-banking player, plans to trim its borrowings from banks and boost loans from the market to counter the impact of the Reserve Bank of India’s recent decision to raise the risk weightage on unsecured consumer loans. The company anticipates a marginal rise of 12-14 basis points in its cost of funds due to this RBI action.
L&T Finance Shifts Focus to Market Borrowings Amid RBI’s Unsecured Credit Risk Adjustment
L&T Finance’s managing director and chief executive, Dinanath Dubhashi, outlined the company’s approach to navigate the challenges posed by the elevated risk weightage. He emphasized the company’s intent to diversify its market borrowings gradually, relying less on bank borrowings, which currently constitute about 33% of its total loans.
To offset the impact on margins, L&T Finance will increase borrowings from markets through debt securities like Non-Convertible Debentures (NCDs), Commercial Papers (CPs), and external commercial borrowings. Dubhashi acknowledged the expected rise in the cost of funds over the next year but highlighted that the impact on Net Interest Margins (NIM) would be mitigated as the increase would be selectively passed on to unsecured consumer lending borrowers.
The company’s unsecured consumer loans, accounting for 8% of the total loan portfolio, amount to approximately ₹6,500 crore. Dubhashi noted that these loans are all above the ₹50,000 ticket size. The retail loan book has witnessed a 33% increase to ₹69,417 crore in the September quarter. Currently, bank borrowings make up 32-33% of the funding profile, and the NIM stands at 12.1% for the July-September period.
Dubhashi expressed confidence in the company’s long-term relationships with banks and emphasized a gradual reduction in bank borrowings. He added that the company’s capital adequacy ratio is at a comfortable 25.16%, with Tier-1 capital at 22.99%, eliminating the need for equity capital infusion for another 4-5 years.
Despite concerns raised by credit bureaus and some lenders regarding increasing delinquencies in small-ticket unsecured loans, L&T Finance reported a robust performance in the September quarter, with a 46% rise in net income to ₹595 crore. The company achieved the highest-ever quarterly retail disbursements of ₹13,499 crore, marking a 32% YoY growth.
L&T Finance continues to shape its portfolio mix, with the retail segment accounting for 88% of the total loan book, while reducing the wholesale book by 76% YoY or ₹28,740 crore.
