GE’s looking for allies in home loans & MRO
Anish Shah took over as president and chief executive officer, GE Capital India, a little more than two months ago. He talks of the company’s aggressive plans in mortgage and aviation maintenance.
Anish Shah took over as president and chief executive officer, GE Capital India, a little more than two months ago. He came from Bank of America, where he headed the debt products business in the US. This is his second stint in GE — he handled the global mortgage business earlier. In an interview with DNA, Shah talks of the company’s aggressive plans in mortgage and aviation maintenance. Excerpts:
Why did you come back to GE and India?
GE is a fantastic company and there are tonnes of opportunities in India. The combination made it a very attractive offer and I didn’t have to think twice. I got a call from an old friend from human resources saying we got this position open and we want you to come back. I was here in ten days.
2008 was a challenging year for GE. How did the US upheaval impact plans in India?
What we saw in the US made GE Capital as well as all the financial services across the world take a look at risk very carefully. One of GE Capital’s strengths has always been its risk engine and that has helped tremendously in these troubled times. We had to tweak it (risk engine) a bit. I wouldn’t say it had a tremendous impact in India. It had some, in terms of us exiting the unsecured personal loan business.
Is this a permanent exit or will you take a relook at it, say two years from now?
I don’t see us relooking unless there is a significant change in the personal loans industry. It is very easy to say things in hindsight, but based on how the model was set up, I do not think we would be relooking at it anytime in the near future.
Was it a mistake to have gone into unsecured loans?
There was a time when risk seemed a lot lower where all the financial services firms did what seemed prudent at that point of time, but as we look back at it, there were some things that we wished we would not have done, and unsecured personal loans is one of them, not only for us but for the entire industry.
You have been one of the biggest financers of the airline industry. What has gone wrong with the model in India?
I think that is a global question because the airline industry has always been very cyclical. It has made a lot of money in the good times and whenever you have had a downturn, it has been one of the first to be hit. That’s exactly the situation now. I would say some Indian airlines are doing better than global ones. Even before the downturn hit, we saw a lot of US airlines going bust or near bankruptcy and doing restructuring, mergers and struggling to survive. From that standpoint, the Indian industry has done fairly well. Capacity utilisation is fairly high from what I see in the industry; the service levels are outstanding compared with the US or Europe. It’s a matter of weathering this downturn and then seeing how we grow from here.
The industry has never found yield vs load equilibrium. Do you guide the airlines or have you financed any?
We have financed a number of airlines here. Our expertise is more in managing the aircraft and the economics around it, and the making of the engine. The running of an airline is something we don’t get into. We look more at the equipment and aircraft itself and help airlines with leasing and purchase.
That must have come down seriously in the last 18 months…
That has come down right now, but we are starting to see some upturn. We are looking at a number of different things with the airlines. I can’t get in to the details right now, but we are starting to see a little more optimism in the industry.
This is about new plane orders?
No, this is more related to maintenance right now and orders for maintenance. I would say new plane orders will take a little more time till we solidify the upturn and after that, I see new plane orders coming in.
How important is the MRO industry for you? It doesn’t exist in India...
It doesn’t exist partly because it is a nascent industry, but it is beginning to get big.
Capt Gopinath (the founder of erstwhile Air Deccan), pointing to the predicament, has said that Indian carriers have to take their planes to Singapore where Indian engineers repair it. Do you plan to promote MROs in partnership with airlines?
We are actively looking at promoting MROs with airlines. We had a conversation with Gopinath and he said exactly the same thing that you said, and it does make sense. This is an area where GE has strengths and we are working with various airlines to see if we can set up an MRO establishment here.
On the one side GE has the credit card business, which is very short-term, and on the other there is infrastructure lending that is real long-term. How do you manage asset-liability issues?
We have a very active treasury desk that does match-funding for our books and the GE Capital model even in the US, where it is one of the largest, is playing in areas where we have expertise and where we can add value for the customer. We have expertise in structured finance, in equipment leasing, in equipment lending and in credit cards and mortgage operations. The treasury desk looks at all the open exposure and uses various means of funding to hedge that.
What’s your average cost of funds?
I cannot give the details, but I would say we are very competitive. Based on our AAA rating, we can get a good rates across all the lines we use - corporate bonds, commercial paper and bank line of credit.
Do you feel the corporate bond market is deep enough to finance infrastructure?
I would say the industry would benefit if foreign funds come in as well. Reserve Bank of India has taken a very good step by allowing external commercial borrowings for specific infrastructure projects. So we are considering how we can set up an infrastructure oriented entity and tap foreign money, because if we can get that at a lower cost than the domestic bond market, that’s a benefit for the new projects coming up.
You plan to set up an infrastructure entity like that?
We are actively looking at that, at a purely infrastructure funding entity.
Will it be like a private equity corpus?
We are looking at various options, sort of equity-cum-debt … just evaluating options at this point of time. The funds will come from abroad only, from a select group of folks the RBI has mandated. We are in discussions with some groups to see how can we get funds to focus on infrastructure.
How has investor interest been like?
Investor interest is good, but we are at a little bit of an early stage there, so I don’t have any specifics as yet in terms of how exactly it is likely to set out.
How has credit growth been for GE Capital?
It has been fairly slow in the last 18 months as it has been with the industry. One of the key decisions we made was to exit the unsecured personal loans business, which we didn’t feel was the right business. What we are doing with GE Capital in India now is starting to focus on operations where we can bring real expertise to the table and add tangible value for customers, so that would be primarily commercial lending, equipment lending, equipment leasing private equity in specific areas and playing in industry sectors which we know well, so that would be infrastructure, healthcare, media, aviation, energy… that’s on the commercial side.
On the consumer side, we got one of the largest platforms with the State Bank of India in the card business and that’s where we got expertise as well. We are the number one player in the US for private label cards and that’s where we feel we can bring in a lot more in. We are also doing a number of private label cards with Dena Bank, United Bank of India, Indian Railways, Spice Jet, with the Tatas, and that’s the model we will look to grow.
What about other consumer loans besides cards?
Unsecured loans we have exited but mortgage is one area we are looking at very closely. I have a deep background in mortgage, having run the global mortgage business for GE in the past. We are looking at what are the options: should we enter the business a lot more aggressively like we are doing right now, or should we look at a partner similar to the SBI Card model where we can bring in our expertise and the partner can bring in the distribution base and knowledge of customers. That, to me, could be a winning model for us.
That means essentially tying up with a bank…
Essentially… because that would be a very valuable thing in the mortgage business and we could bring in our expertise in operations.
Mortgage is a pretty lucrative business in India compared with the US...
It is yes and no, the reason being there are other risks in India in the mortgage business… There is no Freddie Mac and Fannie Mae; you don’t have subprime, which is a positive; you have a different cultural mindset, which is also a positive, and there are a lot of pluses and minuses.
But the consumer is hardly leveraged…
That’s right… because if you look at mortgages as a percentage of GDP in India, it is 5% right now, whereas if you look at most of the developing countries, it’s 60-70%; some countries even higher, so there is a lot of scope and there is a lot of opportunity, so I am bullish on that. The key to mortgage is having a strong knowledge of the customer. It is always very difficult doing a mortgage business based solely on brokers. You will never get the quality that you want. I have seen a big difference in doing mortgage business through a branch than through a broker.
So you won’t go for a DSA set up?
We do have a DSA set-up today, but I wouldn’t grow my business 5 times from today with a DSA set up. If I want to grow my business significantly from where it is today, that to me would be in partnership with someone who has a branch model and knows its customers well.
Are you in active talks with potential partners?
We are in early talks, not what we would consider active talks.
Would this be public sector?
We are open to all at this point of time… haven’t gone into shortlisting candidates, so this is fairly early stage, I have been here only for a few weeks so as we look at strategic options for various different things… we have done a lot of things in various different areas, that’s why some of my answers are early.
Are you lending in the mortgages business right now?
We are lending in the mortgage business, we have a fairly decent size portfolio as well. The home loan portfolio is Rs 1,700 crore and then we do the home equity business as well. So we have got a presence in the business, but our strategic options are, do we grow it as it is on our own or do we see to grow it multi-fold in a short timeframe by partnering with someone where we can bring the expertise and they can bring the customer knowledge?
You never talked to SBI on this? They are doing well in mortgage..
They are doing very well right now, offering very good rates that are beneficial to customers. The mortgage business is a long-term business and I think different folks believe in different strategies, but on balance, it has to make sense for the bank and the customers long term.
Do you see synergies with SBI’s mortgage business right now?
We are looking at various options right now. So we are in very early talks with a wide variety of folks. We look forward to shortlisting and get serious with a few partnerships.
Does it mean you will go slow on your branch expansion?
That’s part of our strategic evaluation… I can’t tell you for certain whether we will grow on our own in a big way or go with a partner and grow it big… that’s part of what we are evaluating right now. We have got about 25-26 branches right now… at this point, our plan is not to expand branches. We are focussing more on our partnerships, so we are looking at how we can expand with SBI and looking at mortgage, should we get into a partnership and expand that partnership as well.
What about the card business? Are you still issuing credit cards because there were issues with delinquencies?
We are very active in issuing credit cards… in fact, that’s an engine which is ramping up right now… I would say that based on data we have seen in the market and from studies we have done, the delinquency rates at SBI Cards are lower than some of our competitors.
What about fees? Did you tweak that as well?
The industry has been on a free-for-life structure and at SBI Cards, we took the step to actually introduce fees, which I would consider was a bold step and there was a lot of discussion on whether that would choke the growth, whether consumers would not apply for a card? But a lot of customers came to take a card with a fee. To me, from a card business standpoint, it’s important to have a fee-based structure and if you can have that, then you can have a model where you can service a lot more customers because spends in India do tend to be a lot lower than spends outside India, acquisition costs are higher, our interest rates are higher. I want to change that model and start getting to lower interest rates and thereby it’s a lot more reasonable for customers to use a credit card to borrow or use a credit card to spend as they want to. Responsible lending is very important.
What’s stopping you from offering lower rates?
We are looking at it right now in terms of different product offerings and we do hope to come back with lower rates in the near future.
Would you be targeting the mass base —- the volume game?
Right now, we are looking at a model that would exist four to five years from hence. Today we have a model that has high interest rates, no fees, a small amount of spend. As this industry matures, I would like to see us end up in a place where you got much lower rates than today, in line with the potential even lower than rates in the US.
What are the rates in the US?
On a average 18-24% on an annualised basis; there are some cards which are lower —-some on promotional rates, about 10% lower than here. I would like to see a model five years from now or maybe earlier, where we got into much lower rates.
What rates would you want to see five years down the line?
I would want to see it at less than 18%. The question is whether we can get there in five years, but ideally, I would want to see that because that way we can offer the customers something that is very strong, that they can use credit when they want to, if they want to, and if they have the ability to.
Does 18% price the unsecured risk you would be taking?
That’s why I said 5 years from now. I wouldn’t say that works today because we want to evolve to a model that prices risk —- you got to have a very tight risk engine and also credit agencies. I think the recent steps the RBI has taken to open up the field to more credit agencies helps a lot and that’s the reason I say five years because it is not something that can be done overnight.
Why did you come back to GE and India?
GE is a fantastic company and there are tonnes of opportunities in India. The combination made it a very attractive offer and I didn’t have to think twice. I got a call from an old friend from human resources saying we got this position open and we want you to come back. I was here in ten days.
2008 was a challenging year for GE. How did the US upheaval impact plans in India?
What we saw in the US made GE Capital as well as all the financial services across the world take a look at risk very carefully. One of GE Capital’s strengths has always been its risk engine and that has helped tremendously in these troubled times. We had to tweak it (risk engine) a bit. I wouldn’t say it had a tremendous impact in India. It had some, in terms of us exiting the unsecured personal loan business.
Is this a permanent exit or will you take a relook at it, say two years from now?
I don’t see us relooking unless there is a significant change in the personal loans industry. It is very easy to say things in hindsight, but based on how the model was set up, I do not think we would be relooking at it anytime in the near future.
Was it a mistake to have gone into unsecured loans?
There was a time when risk seemed a lot lower where all the financial services firms did what seemed prudent at that point of time, but as we look back at it, there were some things that we wished we would not have done, and unsecured personal loans is one of them, not only for us but for the entire industry.
You have been one of the biggest financers of the airline industry. What has gone wrong with the model in India?
I think that is a global question because the airline industry has always been very cyclical. It has made a lot of money in the good times and whenever you have had a downturn, it has been one of the first to be hit. That’s exactly the situation now. I would say some Indian airlines are doing better than global ones. Even before the downturn hit, we saw a lot of US airlines going bust or near bankruptcy and doing restructuring, mergers and struggling to survive. From that standpoint, the Indian industry has done fairly well. Capacity utilisation is fairly high from what I see in the industry; the service levels are outstanding compared with the US or Europe. It’s a matter of weathering this downturn and then seeing how we grow from here.
The industry has never found yield vs load equilibrium. Do you guide the airlines or have you financed any?
We have financed a number of airlines here. Our expertise is more in managing the aircraft and the economics around it, and the making of the engine. The running of an airline is something we don’t get into. We look more at the equipment and aircraft itself and help airlines with leasing and purchase.
That must have come down seriously in the last 18 months…
That has come down right now, but we are starting to see some upturn. We are looking at a number of different things with the airlines. I can’t get in to the details right now, but we are starting to see a little more optimism in the industry.
This is about new plane orders?
No, this is more related to maintenance right now and orders for maintenance. I would say new plane orders will take a little more time till we solidify the upturn and after that, I see new plane orders coming in.
How important is the MRO industry for you? It doesn’t exist in India...
It doesn’t exist partly because it is a nascent industry, but it is beginning to get big.
Capt Gopinath (the founder of erstwhile Air Deccan), pointing to the predicament, has said that Indian carriers have to take their planes to Singapore where Indian engineers repair it. Do you plan to promote MROs in partnership with airlines?
We are actively looking at promoting MROs with airlines. We had a conversation with Gopinath and he said exactly the same thing that you said, and it does make sense. This is an area where GE has strengths and we are working with various airlines to see if we can set up an MRO establishment here.
On the one side GE has the credit card business, which is very short-term, and on the other there is infrastructure lending that is real long-term. How do you manage asset-liability issues?
We have a very active treasury desk that does match-funding for our books and the GE Capital model even in the US, where it is one of the largest, is playing in areas where we have expertise and where we can add value for the customer. We have expertise in structured finance, in equipment leasing, in equipment lending and in credit cards and mortgage operations. The treasury desk looks at all the open exposure and uses various means of funding to hedge that.
What’s your average cost of funds?
I cannot give the details, but I would say we are very competitive. Based on our AAA rating, we can get a good rates across all the lines we use - corporate bonds, commercial paper and bank line of credit.
Do you feel the corporate bond market is deep enough to finance infrastructure?
I would say the industry would benefit if foreign funds come in as well. Reserve Bank of India has taken a very good step by allowing external commercial borrowings for specific infrastructure projects. So we are considering how we can set up an infrastructure oriented entity and tap foreign money, because if we can get that at a lower cost than the domestic bond market, that’s a benefit for the new projects coming up.
You plan to set up an infrastructure entity like that?
We are actively looking at that, at a purely infrastructure funding entity.
Will it be like a private equity corpus?
We are looking at various options, sort of equity-cum-debt … just evaluating options at this point of time. The funds will come from abroad only, from a select group of folks the RBI has mandated. We are in discussions with some groups to see how can we get funds to focus on infrastructure.
How has investor interest been like?
Investor interest is good, but we are at a little bit of an early stage there, so I don’t have any specifics as yet in terms of how exactly it is likely to set out.
How has credit growth been for GE Capital?
It has been fairly slow in the last 18 months as it has been with the industry. One of the key decisions we made was to exit the unsecured personal loans business, which we didn’t feel was the right business. What we are doing with GE Capital in India now is starting to focus on operations where we can bring real expertise to the table and add tangible value for customers, so that would be primarily commercial lending, equipment lending, equipment leasing private equity in specific areas and playing in industry sectors which we know well, so that would be infrastructure, healthcare, media, aviation, energy… that’s on the commercial side.
On the consumer side, we got one of the largest platforms with the State Bank of India in the card business and that’s where we got expertise as well. We are the number one player in the US for private label cards and that’s where we feel we can bring in a lot more in. We are also doing a number of private label cards with Dena Bank, United Bank of India, Indian Railways, Spice Jet, with the Tatas, and that’s the model we will look to grow.
What about other consumer loans besides cards?
Unsecured loans we have exited but mortgage is one area we are looking at very closely. I have a deep background in mortgage, having run the global mortgage business for GE in the past. We are looking at what are the options: should we enter the business a lot more aggressively like we are doing right now, or should we look at a partner similar to the SBI Card model where we can bring in our expertise and the partner can bring in the distribution base and knowledge of customers. That, to me, could be a winning model for us.
That means essentially tying up with a bank…
Essentially… because that would be a very valuable thing in the mortgage business and we could bring in our expertise in operations.
Mortgage is a pretty lucrative business in India compared with the US...
It is yes and no, the reason being there are other risks in India in the mortgage business… There is no Freddie Mac and Fannie Mae; you don’t have subprime, which is a positive; you have a different cultural mindset, which is also a positive, and there are a lot of pluses and minuses.
But the consumer is hardly leveraged…
That’s right… because if you look at mortgages as a percentage of GDP in India, it is 5% right now, whereas if you look at most of the developing countries, it’s 60-70%; some countries even higher, so there is a lot of scope and there is a lot of opportunity, so I am bullish on that. The key to mortgage is having a strong knowledge of the customer. It is always very difficult doing a mortgage business based solely on brokers. You will never get the quality that you want. I have seen a big difference in doing mortgage business through a branch than through a broker.
So you won’t go for a DSA set up?
We do have a DSA set-up today, but I wouldn’t grow my business 5 times from today with a DSA set up. If I want to grow my business significantly from where it is today, that to me would be in partnership with someone who has a branch model and knows its customers well.
Are you in active talks with potential partners?
We are in early talks, not what we would consider active talks.
Would this be public sector?
We are open to all at this point of time… haven’t gone into shortlisting candidates, so this is fairly early stage, I have been here only for a few weeks so as we look at strategic options for various different things… we have done a lot of things in various different areas, that’s why some of my answers are early.
Are you lending in the mortgages business right now?
We are lending in the mortgage business, we have a fairly decent size portfolio as well. The home loan portfolio is Rs 1,700 crore and then we do the home equity business as well. So we have got a presence in the business, but our strategic options are, do we grow it as it is on our own or do we see to grow it multi-fold in a short timeframe by partnering with someone where we can bring the expertise and they can bring the customer knowledge?
You never talked to SBI on this? They are doing well in mortgage..
They are doing very well right now, offering very good rates that are beneficial to customers. The mortgage business is a long-term business and I think different folks believe in different strategies, but on balance, it has to make sense for the bank and the customers long term.
Do you see synergies with SBI’s mortgage business right now?
We are looking at various options right now. So we are in very early talks with a wide variety of folks. We look forward to shortlisting and get serious with a few partnerships.
Does it mean you will go slow on your branch expansion?
That’s part of our strategic evaluation… I can’t tell you for certain whether we will grow on our own in a big way or go with a partner and grow it big… that’s part of what we are evaluating right now. We have got about 25-26 branches right now… at this point, our plan is not to expand branches. We are focussing more on our partnerships, so we are looking at how we can expand with SBI and looking at mortgage, should we get into a partnership and expand that partnership as well.
What about the card business? Are you still issuing credit cards because there were issues with delinquencies?
We are very active in issuing credit cards… in fact, that’s an engine which is ramping up right now… I would say that based on data we have seen in the market and from studies we have done, the delinquency rates at SBI Cards are lower than some of our competitors.
What about fees? Did you tweak that as well?
The industry has been on a free-for-life structure and at SBI Cards, we took the step to actually introduce fees, which I would consider was a bold step and there was a lot of discussion on whether that would choke the growth, whether consumers would not apply for a card? But a lot of customers came to take a card with a fee. To me, from a card business standpoint, it’s important to have a fee-based structure and if you can have that, then you can have a model where you can service a lot more customers because spends in India do tend to be a lot lower than spends outside India, acquisition costs are higher, our interest rates are higher. I want to change that model and start getting to lower interest rates and thereby it’s a lot more reasonable for customers to use a credit card to borrow or use a credit card to spend as they want to. Responsible lending is very important.
What’s stopping you from offering lower rates?
We are looking at it right now in terms of different product offerings and we do hope to come back with lower rates in the near future.
Would you be targeting the mass base —- the volume game?
Right now, we are looking at a model that would exist four to five years from hence. Today we have a model that has high interest rates, no fees, a small amount of spend. As this industry matures, I would like to see us end up in a place where you got much lower rates than today, in line with the potential even lower than rates in the US.
What are the rates in the US?
On a average 18-24% on an annualised basis; there are some cards which are lower —-some on promotional rates, about 10% lower than here. I would like to see a model five years from now or maybe earlier, where we got into much lower rates.
What rates would you want to see five years down the line?
I would want to see it at less than 18%. The question is whether we can get there in five years, but ideally, I would want to see that because that way we can offer the customers something that is very strong, that they can use credit when they want to, if they want to, and if they have the ability to.
Does 18% price the unsecured risk you would be taking?
That’s why I said 5 years from now. I wouldn’t say that works today because we want to evolve to a model that prices risk —- you got to have a very tight risk engine and also credit agencies. I think the recent steps the RBI has taken to open up the field to more credit agencies helps a lot and that’s the reason I say five years because it is not something that can be done overnight.