The co-origination of loans by banks and NBFCs which was expected to reshape the delivery of credit in the country — early estimates pegged the annual incremental flow at Rs 25,000 crore — is now as good as dead. It was always a doubtful arrangement — the sharing of the loan was to be in the 80:20 ratio (banks:NBFCs), but the central bank said that “NBFC shall give an undertaking to the bank that its contribution towards the loan amount is not funded out of borrowing from the co-originating bank, or any other group company of the partner bank.” This cut the funding lines for several NBFCs.
Then, over 10 million retail borrowers of NBFCs have not been able to benefit from the three-month rule relaxation. This, according to CRISIL Ratings, is because NBFCs have already securitised these loans — that is, pooled future receivables or repayments into pass-through-certificates; and sold them to investors such as banks, mutual funds (MFs), insurers and high-net-worth individuals.
Worse, NBFCs could not even fully avail of the scheme, announced in the Union Budget 2019-20. This allowed state-run banks to buy assets from NBFCs up to Rs 1 trillion (were created in their books before the cut-off date of FY19). The Centre was to provide these banks a cushion up to 10 per cent of the losses. While some funds have been offered under this scheme, banks actually reduced their exposure limits to NBFCs!
“The larger issue is who is to provide liquidity for redemption of debentures and commercial papers as NBFCs have a moratorium on their collections. MFs also have become reluctant lenders to the segment of late. Thus, an important source of liquidity has also dried up for the present,” says Vimal Bhandari, executive vice-chairman and CEO of Arka Fincap.
A few key talking points which have emerged of late are as follows – the Indian Accounting Standards (IndAS); the way non-performing assets (NPAs) are classified; and whether a relook at risk-weights is desirable, at all? And soon, private equity firms, which pumped in nearly $5 billion into NBFCs between FY15 and H2FY19 will start to get vocal. Last year saw two marquee deals: Advent International’s move to infuse Rs 1,000 crore into Birla Capital (with a like contribution by the promoters). And Five Star Business Finance which raised $50 million led by TPG Capital, valuing the Chennai-based NBFC at $950 million.
As on date, NBFCs are on IndAS; banks are yet to migrate to it, and have got repeated extensions. In its circular of March 13 , 2020, the RBI said while IndAS 109 does not explicitly define default, its definition adopted for accounting purposes is to be guided by the same used for regulatory purposes – that is 90 days ( Now temporarily relaxed to 180 days). “There is still no clarity as to whether NBFCs have to adhere to IndAS norms or RBI guidelines, or follow both,” says Kanoria.
Should NPA norms for NBFCs be separate from that of banks? It needs to be recalled that these were aligned in 2013 following the Usha Thorat Committee’s report of 2012 — until then, NBFCs were on the 180-day cycle; it was 240-day for state-run NBFCs.
“NBFCs cater largely to borrowers who earn their livelihood in the unorganised sector, where earnings are irregular, subject to fluctuations and volatility. Micro, small and medium enterprises, or the retail non-salaried class, deserve some leniency in their repayment schedules,” observes Nandakumar. As for finetuning capital risk weights based on the nature of the asset backing the loan — say, loans backed by gold should carry the least risk weights being the most liquid collateral – here the view is that this can be abused.
There is also a clamour for setting up a group of experts to explore if the United States’ practice of defining an NPA as per the loan ticket-size can be imported. “It is simplistic to assume that the factors that might lead to a default in a payment of a home, or a car loan or any other asset class, are at a par with that pertaining to an infrastructure project,” says Kanoria.
So where are we today? “From the challenges and difficulties of today, a new stronger resilient tomorrow will arise. I am sure of that,” says Bhandari. It’s the self-effacing industry veteran’s way of putting it mildly that Covid will not take many prisoners coming as it is within two years after the meltdown at the Infrastructure Leasing and Financial Services.