Small finance banks and NBFCs to recover, realty to benefit post rate cut: Abhay Agarwal

Abhay Agarwal, Founder & Fund Manager, Piper Serica, says small finance banks and NBFCs are expected to recover following the Reserve Bank of India's push for rate cut transmission. This is expected to initiate a positive economic cycle involving consumption, private capital expenditure, and job creation. The real estate sector stands to benefit significantly from these rate cuts.

You have been liking the financial space and you were vouching for some of these small ticket financial counters from the NBFC sides. The recent news flow gives us some sense about how this news flow can be a big booster to these companies.
Abhay Agarwal: This is a great example of walking the talk. Since early this year, we have been hearing about the government's intent and the government's intent has never been in doubt to promote growth in a way that percolates to the bottom part of the pyramid.

What we have seen since the budget is that there were tax cuts and liquidity thereafter brought in by RBI and today's front-loaded rate cuts. This is a great example of walking the talk, giving a lot of confidence to market participants that the government means business. Last year, the RBI had tightened liquidity.

I think it was a mistake that has been corrected now. So, our bet was that because of very stringent credit control actions by RBI last year, a lot of small banks, SFBs and unsecured lenders, who are good lenders and meet a very critical need of the bottom of the pyramid borrowers, but who do not have assets to secure, but have cash flows to pay back their loans got locked out of the market completely. There are a lot of small ticket borrowers, who are ready to pay, and are not wilful defaulters. But because of delayed payments, they were treated as NPAs. I thought that was an accounting thing that will correct itself. I think that is where we are headed.

A lot of these small finance banks, small NBFCs that got beaten down because of poor results in the March quarter will now come back because the credit flow will start. There is push from the RBI governor to transmit the rate cuts and not for the banks to make all the margins. All in all, our investment thesis has become stronger. Regarding the five or six banks that we added to our model portfolio a couple of months back, we are very happy that we did what we did then and I am very hopeful that this rate cut will now start a very virtuous economic cycle of consumption, and then private capex, leading to employment and further consumption. All markets are cheering for the same thing.

What is your view on the real estate sector? What kind of move are you seeing going forward in the real estate sector? If demand increases like you were mentioning, consumption is expected to get a boost. So, if demand increases for the real estate space, is there also going to be an uptick when it comes to the industrial and manufacturing space?
Abhay Agarwal: The real estate sector is one of the most rate sensitive sectors for two reasons. One, the builders themselves borrow to build and they are always leveraged. So, any rate cut is a very positive situation for their balance sheet and their P&L statement. It gives them the ability to borrow more and build faster and it helps on the consumer side also.

You were making a very interesting point on the real estate pack highlighting that it is one of the most interest rate sensitive sectors/ How do you see the move ahead, given a day wherein these counters are anywhere up between 6% and 7%, do you believe there is further headroom and now is a fresh leg of runoff we can anticipate?
Abhay Agarwal: The markets on the whole will go towards new highs. There is no reason for them not to. A lot of problems, a lot of issues that we had earlier this year fundamentally and technically are behind us. In the real estate sector itself, there is a gigantic pent-up demand. I mean, as a developing country for the kind of number of people that we have, number of families they have, number one aspiration is to own your own home and you can be different strata.

You may want to build a home in a small city, you may want to buy a condominium or a penthouse in a large city – it is everybody's dream and aspiration. So, this is a sector that has not really got its dues because it is infested by archaic government policies related to regulations which are most of them are unnecessary approvals, high costs of approvals, high transactional costs. It is about time that the government takes a very sharp look at this whole sector and starts making sure that there is less regulation and it is faster for developers to build, it is easier for customers to buy cheaper for customers to buy.

I am very hopeful that this government. particularly with their awas yojana schemes, will support that. I am quite hopeful that we will see more announcements related to the real estate sector going forward and that will continue to drive the real estate stocks also.