NBFCs will be in goodwill hunting mode for some time to come: Experts

Illustration by Binay Sinha
Is the worst over for non-banking financial companies (NBFCs)? Keki Mistry, vice-chairman and chief executive officer (CEO) of the Housing Development Finance Corporation (HDFC) feels “though the liquidity situation has eased considerably as compared to what it was in September 2018, the reluctance to lend to NBFCs is still there”.

Jaspal Singh Bindra, executive chairman of the Centrum Group, is miffed: “The liquidity issue is there across-the-board for NBFCs and housing finance companies (HFCs). NBFCs have been painted with one brush; mutual funds (MF) have been painted with another.” 

It’s unlikely Mistry and Bindra will tell you it is to be a long night, but then you have the numbers.

Total commercial paper (CP) issuances in June 2019 stood at Rs 50,950 crore, lower by 31 per cent over May 2019, (and 65 per cent lower than what it was a year ago). Of this, NBFCs and HFCs raised Rs 16,955 crore — half the amount raised in May! While yields on CPs came down for both categories by 34 basis points (bps) and 75 bps on a month-on-month basis, and by 85 bps and 70 bps year-on-year, it has not resulted in a bigger mop up through this route. Blame it on the reluctance to take on more sectoral risk. And the central bank has also tightened the asset-liability management norms for NBFCs. This has made tapping CPs difficult. The question is — who is to supply liquidity to NBFCs from here on?

Wings and oars

Look closer at the central bank’s move to hike bank’s single counter-party exposure to an NBFC to 20 per cent of its tier-capital from 15 per cent. The total tier-1 capital of banks has been estimated at Rs 10 trillion; the 5 per cent increase will allow banks to take on fresh exposure of Rs 50,000 crore and hence, an overall exposure of Rs 2 trillion to a single NBFC. You have been told the liquidity-tap for NBFCs has been opened, but will it lead to sufficient flow of funds?

“No NBFC will potentially have such a huge exposure to the banking system. It may enable individual banks breaching the single NBFC exposure limit to extend fresh funding,” points out Karthik Srinivasan, senior vice-president and group head (financial sector ratings). What’s also being missed out here is that many banks are well within the current counter-party limit of 15 per cent of their tier-I capital and have shown no appetite to extend loans to the sector anyway. “Why should they do so now?” asks the CEO of a large NBFC who has resigned himself to the bad times, and adds: “Just because systemic liquidity or exposure norms have been eased does not mean banks will lend more to us.”

Mistry feels the trust deficit can be bridged. “The Reserve Bank of India (RBI) could consider initiating conversations with senior bankers to give them the confidence to start funding NBFCs,” he says. But will this be of any help?

You have another variable to contend with – the reality staring at state-run banks even as their CEOs publicly state that they will handhold NBFCs.

 
The market of these banks fell sharply to 46.5 per cent in FY19 from 60.9 per cent in FY14; their share of incremental credit during this period stood at 26.2 per cent. This was both due to the rise in bad loans and the attendant provisioning eating up their capital; and the fact that 11 state-run banks were under the central bank’s prompt correction action framework for much of this time. Six banks walked out of it only in February this year.

While private and foreign banks, NBFCs, HFCs and MFs had stepped into vacuum, the chessboard looks very different after the blowout at the Infrastructure Leading & Financial Services, and what’s unravelled at Dewan Housing Finance Corporation. Banks of all hues have turned selective in lending to NBFCs and HFCs; and MF appetite for CPs and bonds floated by these entities is significantly lower.

Between many and a few

As on date, NBFCs are categorised based on the nature of the activities they undertake: asset finance companies (AFCs), loan companies (LCs), mortgage guarantee companies, and core investment companies. And, on the basis of deposits, they are categorised as deposit-accepting and non-deposit accepting entities.

So, what is to make of the move to treat bank loans to NBFCs for on-lending to agriculture, micro and small enterprises, and housing as priority sector exposure, up to specified limits? “Positive steps are being taken and we should appreciate them. I think all these steps will impact different companies differently,” says Rajiv Sabharwal, managing director & CEO of Tata Capital. Or for that matter, the partial-guarantee scheme to purchase high-rated pooled assets of sound NBFCs announced in the Budget? “It may help some of the bigger boys. To the extent that the sentiment eases, it’s going to be helpful”, says Bindra. What’s unsaid in all this is while the central bank has classified NBFCs on the basis of activities and deposits from a regulatory point of view, the impact of the reliefs offered is also not uniform.

“Admittedly, there are too many categories of NBFC’s currently and every time the regulator comes out with policy changes, they get applied only to some NBFCs and others are left out. I do agree that harmonisation will help in getting the policies applied uniformly,” concedes Mistry. In February this year, the RBI said AFCs, LCs, and investment companies will be merged into a new category —‘NBFC-Investment and Credit Company’.

 
Then, you have another matter of detail which has hit just about everybody. It is called the “fifty-fifty test”. A company is said to be in the principal business of financial activity when such assets are more than 50 per cent of the total assets; and income from them is more than 50 per cent of the gross income. The term “principal business” is not defined by the RBI Act; it has been defined by the central bank to ensure that only companies predominantly engaged in financial activity get registered with it, and are regulated and supervised by it. The trouble is many  of  these fall outside the ambit of this definition also  seek bank credit; and the current logjam has affected them too.And,  this, in turn, affects the small enterprises they service in the hinterland.

 
Whichever way you look at it, NBFCs will be in goodwill hunting mode for some time to come.


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