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.