Piramal Capital sees four-fold rise in retail book

More than a year back, it was not too clear why Piramal group was willing to pay top dollars to buy out the defunct Dewan Housing Finance Ltd (DHFL) from the NCLT. Now the story is falling place. Piramal Finance, formerly Piramal Capital and Housing Ltd, has already built its housing loan book to constitute a substantial portion of its retail lending book. Now it has aggressive plans to grow its margins and also to de-risk the business model. Piramal Finance is looking to expand the retail lending book by four-fold over the next 3 years and cross the Rs1 trillion AUM mark. Its retail loan book currently stands at Rs. 24,872 crores and Piramal Finance proposes to grow this retail book to well above the Rs. 100,000 crore mark.

Piramal Finance is now being led by Jairam Sridharan, a former Axis Bank honcho, who just about lost out on the top job when Shikha Sharma completed her tenure. He is planning to replicate the aggressive growth strategy at Piramal Finance by growing its retail asset book by nearly 300% over the next four years, on the back of a rapid growth in demand for consumer finance. Currently, the retail book is a little under Rs. 25,000 crore but it exposure to developer funding in the real estate business is more than Rs. 42,000 crore. Clearly, the new management at Piramal Finance is not happy with this rather skewed asset mix and want to de-risk the business model by increasing the share of retail finance.

Currently, the AUM of Piramal Finance stands at Rs. 63,870 crore which comprises of the retail book and the developer financing book. The target here is to reach Rs. 1 trillion in assets under management (AUM) within the next 3 years. In addition, Piramal Finance also wants to ensure that in the next 3 years, the consumer finance business itself grows to around Rs. 70,000 crore or about 70% of the total retail book size. Developer finance as a business unit will continue even in the future, but Piramal Finance is very keen that the weightage of developer finance in the overall mix of assets of the Piramal Funding book must reduce substantially to ensure cyclical shocks from any downturn in realty cycle.

On the home finance segment, the intent is to focus on the credit needs of the underserved sections of society. This has its own set of risks, but we shall not get into that at this point of time. The company plans to focus on budget-conscious customers as well as medium and small businesses in tier-2 and tier-3 towns. Even now, most of its lending book in volume terms comes from the affordable housing segment. The process has also been tweaked to look at parameters beyond past documentation as the only method to assess the creditworthiness of the potential lending customer.

Piramal Finance has taken a much broader definition of consumer finance, which will constate nearly 70% of the Rs1 trillion retail book. The focus here will be the consumer business but it will include all businesses that are directed towards individual or MSME borrowers. According to Sridharan, this is a segment where not too much of credit history is available and hence traditional metrics of credit evaluation cannot be used. Instead, they have to rely more on the use of technology and spending patterns to gauge the credit worthiness of these borrowers. Sridharan believes that this type of credit evaluation can be relatively complex but it is feasible since this segment is more credit conscious.

Interestingly, Piramal Finance has launched a dedicated innovation lab in the city of Bengaluru and is investing quite aggressively in investing in technology and analytics. This is an important input in the credit evaluation process since traditional metrics don’t work in most cases. Piramal Finance has also tied up with multiple data service providers, who would help it obtain information about segments of the population where the structured data is not readily available. It would be interesting to see how this technology and credit evaluation is addressed, but if they can get it right then Sridharan will have reasons to pat himself on the back.