The policy easing by the Reserve Bank of India after nine months has struck a chord among the private equity investors. The investors, who have been witnessing a more challenging environment over the years, are terming the policy announcement as one “in the right direction”.
The apex bank lowered its key policy rates and cash reserve ratio (CRR) by 25 bps to 7.75 per cent and 4 per cent respectively, but remained cautious of the slower growth and government’s large fiscal deficit.
A cut in lending rate would lead the banks to trim their lending rates to the borrowers, while the CRR cut would inject Rs 18,000 crore into the banking system, which has a tightened liquidity situation.
PE investors say that increased liquidity situation would help the fund flows into more companies and lowers the cost of fund. In the medium term, it is very supportive of the investors, but the long-term implications depend on the budget, they noted.
“The rate cut would boost investor sentiment. However, the policy change is not going to help in isolation, now the government has take it forward,” said Vishakha Mulye, managing director & CEO, ICICI Venture.
Though the banks might not be in a position to transmit the reduced interest rates to borrowers immediately, the PE players expect the profit and loss of the investee companies to improve.
“The RBI has being monitoring the inflation and finally taken a call to do the right thing. The borrowing cost is going to come down and the investment climate would be better in 2013 than last year,” said Jayanta Banerjee, managing partner, ASK Pravi Capital Advisors.
Though the rate cut would have a benign effect, he said it does change the sentiment and the finance ministry is very supportive of the investments.
For the investors, India as an asset class among LPs is not sought-after and the fundraising has been muted in the last three years, forcing PEs to reassess their investment strategies. When the fund raising is not easy, and with the dry powder coming down, there would be a consolidation among PE investors in next 2-3 years, said the investors.
A few investors are seeing no medium term change among the investee companies, but in the long run, a lot of it also depends on the budget. “There won’t be a dramatic change in the market, but the policy foretells a trend in the longer run”, said Amit Varma, managing partner, Quadria Capital.
It is a good step, but as the year goes on, the fiscal deficit and inflation trajectory has to be keenly watched, he added.
Keeping in view the expected moderation in non-food manufactured products inflation, domestic supply-demand balances and global trends in commodity prices, the RBI revised the baseline WPI inflation projection for March 2013 from 7.5 per cent set out in the second quarterly review to 6.8 per cent.
The investors also added that the valuation, which is a function of the company and the outlook, would improve if the momentum is maintained.
While a 25 bps cut would not create a world of difference among the investing community, the non-banking finance companies (NBFC) are expected to benefit immediately.
Social investor Lok Capital said that the micro-finance institutions (NBFC-MFIs), would reduce the lending rates in accordance with the banks benefitting the borrowers.
Venky Natarajan, managing partner, Lok Advisory Services said, “If the banks reduce the lending rates, the MFI would have to follow it. The reduction would not benefit MFI because of the margin cap by the regulator, while benefits get transmitted to the customer”.
Other NBFCs generally find it very difficult to raise loan from the banks, so they borrow from other sources, he said, adding some of them have a borrowing cost of 16 per cent. “Any reduction is a tremendous help”, he said.
Post the AP-crisis in the MFI sector in 2008, there was a lull among the investors and banks in lending to the sector. However, the situation turned around when the banks began lending to the sector last year but preferred larger MFIs.
According to Natarajan, the improved liquidity situation would give a fillip to banks to lend to smaller MFIs as well.
(Edited by Prem Udayabhanu)