NBFC loan purchase may help SBI meet priority sector targets

But the acquisitions must be made for prudent commercial reasons

On Tuesday, India’s largest bank, SBI, said it would purchase good-quality asset portfolios from Non Banking Finance Companies (NBFCs) worth ~450 billion. The bank sees an opportunity to expand its loan portfolio at attractive rates and to help it meet its priority sector targets in areas such as the farm sector, SME infrastructure and the social sector. There’s no denying that NBFCs have come to play a far more important role in India’s financial sector over the past few years, when many Indian banks saddled with bad loans started shrinking their balance sheets. NBFCs filled this void, as reflected in the fact that bank lending to this segment now aggregates ~4.73 trillion, making up 19 per cent of overall credit, while the exposure of mutual funds to these companies in the form of investment in their commercial paper and non-convertible debentures has grown substantially.

It may well be that the SBI decided to move aggressively on portfolio purchase of loans from NBFCs after the RBI unveiled new rules for co-origination of loans — which are aimed at leveraging the reach of NBFCs while helping banks meet their priority sector targets, with joint involvement of both in lending and sharing of risks. The onus is now on the SBI to demonstrate that the portfolio purchase of NBFC loans rests on prudent commercial reasons and that the decision is not a forced one.