I understand your perspective on the investment in non-lending finance companies, and you make valid points. However, the dynamics of the lending business for banks and NBFCs are somewhat different, and it’s important to consider these distinctions.
One crucial aspect to highlight is the relationship between loan growth and equity dilution due to regulatory requirements for core equity capital. Regulatory capital adequacy norms mandate that every lender must have a certain amount of core net worth invested in their lending activities. This means that if a bank or NBFC generates a ROE of 14-15% and wishes to avoid diluting equity, their growth potential is limited to around 11-12%.
For instance, a bank like IDFC First, which generates an ROE of approximately 11% but aims to grow its loan book by over 20%, has no choice but to continuously dilute its equity. This scenario applies not only to IDFC First Bank but also to other banks and lending NBFCs, including prominent names like Bajaj Finance, ICICI Bank, Axis Bank, SBI, and HDFC Bank.
In my experience, the only financial institution that has managed to avoid this trend was the erstwhile Gruh Finance, which generated an impressive ROE of over 27-28% while maintaining a lower growth rate of 18-20%. This exceptional performance allowed them to grow without the need for frequent equity dilution.
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