Rein­ing-in NBFCs

Tak­ing over an en­tity like IL&FS comes with its own set of chal­lenges

Financial Chronicle - - EDIT, OPED, THE WORKS - Mymind@my­dig­i­talfc.com

SHOULD Life In­surance Cor­po­ra­tion (LIC), Na­tional Hous­ing Bank (NHB) or State Bank of In­dia (SBI) bail out much-tainted In­fra­struc­ture Leas­ing & Fi­nan­cial Ser­vices (IL&FS) that piled up over Rs 91,000 crore in debt? Is it sus­tain­able to pump good money into a bad com­pany even if it holds some very bank­able as­sets? SBI’s de­ci­sion to pump in Rs 45,000 crore as part of a res­cue ef­fort to buy up non-bank­ing fi­nan­cial com­pa­nies’ (NBFCs) loan port­fo­lios is a case in point even if it perked up mar­kets in one trad­ing day. Sim­i­larly, NHB fish­ing for bet­ter as­sets or loans with NBFCs sets the tone for oth­ers to join in. For LIC to look at IL&FS as­sets is not a busi­ness op­por­tu­nity but re- flects its ea­ger­ness to trim pos­si­ble losses it may ac­crue on the ac­count. In ef­fect, sev­eral top banks, in­sur­ers and play­ers in the fi­nan­cial ser­vices in­dus­try are look­ing for op­por­tu­ni­ties in the NBFCs quag­mire. Al­ready, LIC was stuck with IDBI Bank though there was no rea­son why the in­surer should be run­ning a failed bank – un­less it was a com­mand perfo- rmance with or­ders com­ing from else­where.

Clos­ing in on a lu­cra­tive busi­ness op­por­tu­nity in times of cri­sis is not bad in in­tent or as a cor­po­rate strat­egy. But, will the man­age­ments of LIC, NHB or SBI be able to han­dle such op­por­tu­ni­ties that come with their own set of chal­lenges. The pos­si­bil­ity of merg­ers and ac­qui­si­tions con­tin­ues to hog the lime­light at a time when IL&FS man­age­ment headed by Uday Ko­tak is busy weigh­ing the op­tions to sal­vage the group. Keen in­ter­est in NBFC as­sets has only led to im­proved liq­uid­ity es­pe­cially ahead of the Oc­to­ber-Fe­bru­ary fes­tive sea­son when credit de­mand usu­ally picks up with in­di­vid­u­als and SMEs. Liq­uid­ity apart, it is im­por­tant to know the strat­egy of spon­sor­ing banks to deal with NBFCs. What could be the Re­serve Bank of In­dia’s (RBI) role in lim­it­ing the dam­age in­flicted by IL&FS on NBFCs? Should gov­ern­ment use tax­pay­ers’ money to bail out badly run com­pa­nies? Can a frame­work be evolved to pre­vent such fail­ures in fu­ture? These ques­tions need to be col­lec­tively ad­dressed by all stake­hold­ers.

The col­lapse of the fi­nan­cial be­he­moth Unit Trust of In­dia (UTI) and the house­hold in­vest­ment in­stru­ment, US-64, that wiped out sav­ings of sev­eral thou­sands of fam­i­lies in 2000-01 is a case in point. Small in­vestors ended up poorer by los­ing Rs 20,000 crore parked in US-64. When the UTI Act and Sebi norms were be­ing bla­tantly vi­o­lated, and the man­age­ment of the fund and in­vest­ment de­ci­sions were be­ing made on other than pro­fes­sional con­sid­er­a­tions, the gov­ern­ment of the day be­haved like an os­trich with its head buried in the sand. A sim­i­lar cri­sis may be star­ing in the face for IL&FS. The Se­ri­ous Frauds In­ves­ti­ga­tion Of­fice (SFIO) can per­haps pin­point re­spon­si­bil­ity for such a de­cline.

Sev­eral NBFCs have re­port­edly vi­o­lated RBI norms on lim­it­ing the lend­ing to 50 per cent eq­uity value of com­pa­nies. The vi­o­la­tion of this dik­tat seems to have led to the present cri­sis. NBFCs would have be­haved more pru­dently had RBI ag­gres­sively dis­charged its re­spon­si­bil­i­ties as a regulator and de­vel­oper of this sec­tor. Even if the fi­nance min­istry was un­aware of the de­vel­op­ments, why did the RBI re­main silent thus far af­ter hav­ing dished out norms gov­ern­ing NBFCs from time to time? IL&FS de­vel­op­ments have no doubt hit eq­uity mar­kets and al­beit in­di­rectly, the banks and spon­sor­ing fi­nan­cial in­sti­tu­tions. Learn­ing quick lessons, stem­ming the rot and re­form­ing NBFCs are the way out.

Sev­eral NBFCs have re­port­edly vi­o­lated RBI norms on lim­it­ing the lend­ing to 50 per cent eq­uity value of com­pa­nies. The vi­o­la­tion of this dik­tat seems to have led to the present cri­sis.

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