At Capital First, only 1.5% of LAP loans paid back in cash: V Vaidyanathan, Capital First

In a chat with ET Now, V Vaidyanathan, Founder & Chairman, Capital First, says in loan against property we should not forget it is not the property that is paying you, it is cash, it is the businesses that are earning money and paying you back

Edited excerpts

There is long-term merit but short-term pain. I really want to understand from you the impact now. The news is a week old. What has been the first hand experience at capital first?

We should distinguish between a liquidity issue and a solvency issue. Right now, it is only liquidity issue. Basically traders which are a substantial part of the people to whom we lend, small shopkeepers, traders, entrepreneurs, etc, to whom we lend, they have the cash. They go and deposit the money in the bank. They are unable to withdraw it because of withdrawal limits and therefore they are in a situation where they might have a temporary mismatch in terms of being able to pay. It is not ability to pay issue.

In our case at Capital First, 100% of our customers can pay us in the form of PDCs or electronic clearing instruments, 100%. Only the customers who return their cheque which is the about 10%, when we go back and collect from them which is also close to about 5%/ That means about 5% pay by cash. For these 5% customers, if they do not have the cash in hand, they may have a temporary mismatch in their ability to pay but I am told reliably that the Rs 500 note that has come back to the system from yesterday is quite substantial. I read an interview this morning by SBI chief saying that the queue is much shorter. Clearly, the moment cash comes back in people’s hands, the repayment cycle will start again. So, it is a liquidity issue and not a solvency issue. If this issue stretches on for three months or four months or eight months or something like that, that could become a solvency issue but a week this side, a month that side, does not make a difference.

Analysts are saying that the maximum impact is going to be felt on NBFCs’ LAP books. Your MSME segment operates mainly on the LAP book. What kind of an impact could we see there because the hardest hit sector is going to be property, real estate.

In our loan against property book, 98.5% of our collections is coming through electronic instruments even today, that is only 1.5% is collected in form of cash. On loan against property, there is another big benefit. LTV is only 42%, and people are talking about property prices crackingIf property prices dropped 20%, 30%, 42% is a big cover but in any case, in loan against property we should not forget it is not the property that is paying you, it is cash, it is the businesses that are earning money and paying you back. So as long as liquidity comes back, solvency remains same, customers will pay. This issue about loan against property is overdone because of the fact that the property is not paying…

You were talking about the LAP book and how critical is it to your existence?

At the end of the day, we should be fine on loan against property. The fact is it is businesses which are paying you back, it is not the property that is paying you back it is an important factor to remember.

But considering property is a critical factor and it is eventually the property which is security, when the prices come down, do you not feel that there will be some of the cases where cheques would bounce, your payments would bounce and asset quality would turn negative?

I shared numbers with you in loan against property. Usually about 90% customers clear their instalments in the first attempt. That leaves 10% of them. As I said, about 8.5% pay you back again in the form of cheques again that is 1.5%. I am saying it is not really a big deal.

So that is one side which is your existing loan book and how it is currently ring-fenced but then what happens to the future growth loans against property that business is going to slowdown? The consumer or the buyer has to feel happy when you commit to a purchase, when you commit to an EMI and suddenly you do not feel happy about what is going on?

There is so much of talk in the last three days about how demand destruction is happening and it is true lots of retailers, shopkeepers, salons are reporting a 40% drop in their sales. But exactly one year from now, let us imagine interest rates came down by 100-150 bps, picture a scenario where homes are available at say 8%, fiscal deficit has come down, Rs 3 lakh crore has suddenly come to the banking system. When you picture all of these pieces together and then you suddenly imagine that the world will wake up to its potential as it seconomy size becomes larger. When you paint that picture then you realise this is a it is a passing shower and after all for such a large country with may be 20-30% in the parallel economy, any change takes some time.

Cash collection it can get disrupted for may be a month-two months but in a larger picture does it really matter?

So the transition time you are saying maximum will take one year? There are people who use part cash…let us say somebody has a requirement of Rs 5 lakh or Rs 2 lakh they have part cash with them and therefore they can go in and ask a Capital First for the remainder of the loan in order to either buy the instrument or use the money for business processes if that cash is out of the system and people do not have that cash does your future growth come under threat, what portion is of your disbursements are fully funded versus part funded?

Our sense is that it is not a growth impact at all…not at all because we talked about it the extent of under penetration in India about financing is so large that this event is not going to change and it is not that suddenly to this process people got credit, no. People are still as credit starved as before, money will always be required. If anything there was a huge large peer to peer developer market, a businessman to businessman lending market in cash. For example, if you go to a diamond market, it is a huge cash market operating out there that will actually move over to the formal financial system. So I feel that on credit growth you take a one-year forward, at least our guidance for a 25% growth in loan book next year is pretty much on if anything we might have a bit of an upside.

What happens at corporate level, at SME level? Now businesses will get jammed. NPA recovery had just about started and at SME level, they have a reason not to pay back. They can call up the bank manager and say dhanda hi khatam ho gaya, paisa nahi denge, you see that cycle could stop?

You really cannot make an argument like that at all. Let me take Capital First’s example. We have close to 3 million customers. We have texted them repeatedly and told them that look please open your account with PayTM and pay us, come to a internet bank account and pay us. This process is very much on. Right now there is a disruption because queues are long, customers are unable to go and put a cash then give us a cheque from there that portion is disrupted but every other means open. I do not think customers can make a case for that at all.

What happens at the bank level? Could there be a situation where the SME companies may actually feel the heat and default on their loans with the PSU banks. They will have challenges in paying back not because intention is bad but because business is bad.

Very true people could face and I entirely agree that if it is a small entrepreneur you are not able to leave your shop and you cannot go to the bank and you cannot stand in the queue. Yes your process could get disrupted but for how long? We are talking of the fact that by December 31,st the whole system would have got replaced. So finally we have a one-month disruption, a two-month disruption. When does the solvency issues comes up, solvency issue comes when trade permanently gets hit and comes down 40%. But situations it is not such a situation today.

You have recently raised Rs 340 crore as capital. What is the capital adequacy tier one now?

We are very happy the investor we got is GIC. They are a $100 billion fund and they have agreed to invest in Capital First at a Rs 712 a share as per the Sebi norms and that will take our capital adequacy to 21.6%.

This will last for a while.

This will last for a while at least we feel may be anywhere between two to two and a half to three years probably in that zone.