Saving New-age NBFCs and Fintechs

Founders of newage NBFCs and fintech lending platforms are mostly professionals with limited capital.

In a post- Covid world, banks have turned their back on them. The public market borrowing window is not available to them as they are too small to get any interest from investors. That leaves them with private equity players and venture capitalists that have backed them. “But they are, too, returnoriented,” says the founder of a fintech firm.

So, will these lenders to underbanked and underserved segments survive or perish?

“Every past crisis ( The microfinance crisis in Andhra Pradesh or the financial crisis of 2008) has shown that a small or micro customer always fights back and comes out of the crisis. But bankers react by withdrawing credit since they turn risk- averse,” says Manish Khera, Founder & CEO, Happy Money – a lending Fintech firm.

According to Pramod Bhasin, Chairman of online lending platform Clix Capital, this is the time for bolder action, particularly opening up special credit lines and insurance for companies. Banks do not offer any moratorium to fintech firms and NBFCs, and these firms have no option but to accommodate their ‘micro’ customers in stressful times. “Books of fintech firms are very small with exposure to gig workers, the self- employed panwallah or the tea seller. Any exposure to them means an exposure in the unsecured space,” says a consultant.

Such a situation is likely to lead to assetliability mismatch. Prolonged lockdown and job losses would increase the delinquencies in asset portfolios. Shachindra Nath, Executive Chairman and Managing Director, U GRO Capital, says most vulnerable players are early- stage fintech firms and small- sized niche NBFCs. “We are reaching out to every platform that is valueaccretive to us,” he adds, hinting at consolidation opportunity.

Fintech firms are addressing the crisis by offering moratorium to borrowers and monitoring portfolios. They are also trying to reach out to banks and investors, even at a cost of paying a higher interest. “You have to be emphatic to them (customers) and extend help in these difficult times,” says Nalin Agrawal, Co- founder and CEO, Snapmint – an e- commerce and fintech start- up.

availing moratorium facility. “Provisioning requirements for banks can increase by ` 30,000-40,000 crore because of stressed accounts under moratorium,” says Karthik Srinivasan, Senior Vice President at rating agency ICRA. In addition, there are a number of cases stuck under the Insolvency & Bankruptcy Code ( IBC), where there will be need for higher provisioning – from 50 per cent to 100 per cent – in case the company went into liquidation. Globally, Bank of America, Citigroup and Goldman Sachs have set aside billions of dollars for possible losses.

“There is a need for bringing back the debt restructuring schemes with NPA forebearence,” says Chunduru of Indian Bank. Currently, banks can restructure loan accounts, but they will still be classified as non-performing assets ( NPAs). NBFCs have asked the RBI for a one-time restructuring option without classifying loans as NPAs. Banks should be incentivised to support borrowers by way of guarantees, assured buy-back or credit enhancement in infrastructure projects.

LIQUIDITY: NBFCs Gasping, Banks Flush with Funds

Banks and NBFCs are on two extreme ends in terms of liquidity. Banks are flush with funds and do not have enough options to lend it profitably. Some have cut deposit rates like SBI, for example, which reduced its savings rate to a historic low of 2.75 per cent per annum. Banks are resetting their fixed deposit rates downwards. Faced with low credit growth and risk aversion at this juncture, a large amount of liquidity is flowing back from banks to the RBI under the reverse repo window. Meanwhile, the deposit space vacated by large banks is offering a good opportunity to small finance banks and new private lenders like IDFC First Bank and Bandhan Bank to continue their premium pricing of deposits rates as their business model of highyielding loan assets allows them a good interest margin. “We have seen some slowdown in deposit momentum post the Yes Bank fiasco. I would say getting the whole deposit momentum back will be our top priority,” says Kanwal of Jana Small Finance Bank.

NBFCs are gasping for liquidity since they depend mostly on wholesale funding from banks, commercial papers (CPs) and non- convertible debentures ( NCDs). They currently net around ` 2 lakh crore from these two instruments. Banks, with around ` 7 lakh crore in exposure to NBFCs, are in no mood to increase their exposure. There is also no moratorium offered by banks to NBFCs on these loans. This is adding to their problems. Also, the RBI’s move to provide ` 25,000 crore through the National Bank for Agriculture and Rural Development ( NABARD) to small and medium MFIs will be of some help, but they will still need money as CPs and debenture holders won’t offer them a rollover. In the last one year, especially after the IL& FS debacle, risk- averse MFs have already reduced their exposure in CPs and NCDs of NBFCs. A CRISIL analysis of NBFCs, rated by them, shows liquidity pressure will increase for nearly a quarter of them if collections do not pick by June 2020. “These NBFCs have ` 1.75 lakh crore of debt obligation maturing by then,” according to CRISIL.

NBFCs are demanding a direct low- cost borrowing window from the RBI for up to a year, but the regulator is yet to take a decision. In fact, they are also exploring the securitisation route to sell assets, especially MFI portfolio, and generate liquidity. Some banks, especially private ones, are keen on MFI loan portfolios since such loans are part of priority sector lending.

CAPITAL: Conserve and Raise

Unlike the 2008 global financial crisis when the government and regulator came forward to bail out banks, this time the Centre is fighting this pandemic by using the already vulnerable banking system to help the industry, by postponing EMI collections. The RBI has asked banks to suspend dividend payments to shareholders to conserve banks’ capital. But lenders will need a stronger capital position to face any eventuality. Kotak Bank is tapping the market with an equity issue. Many banks may not be that lucky since the market capitalisation of banks have fallen considerably in the last two months. One way would be to raise debt capital from institutions. Public sector banks, which control two-thirds of the banking system, may also need recapitalisation.

There are also other ways to conserve capital. “You have to lend to high-rated borrowers so that risk-weighted assets come down,” says Chunduru of Indian Bank.

“Banks will also have to change their operating models like outsourcing, using shared services, not buying but renting out, etc.,” suggests Rath of SBM Bank.