CAN NBFCs BE SAVED?
The crisis in India’s shadow banking sector will no doubt hang heavy over the upcoming RBI board meeting. Is a bailout possible?
The NBFC crisis will hang heavy over the upcoming RBI board meeting. Is a solution in sight?
WHAT SEEMED TO BE A DEBT DEFAULT by a single large nonbanking financial company (NBFC)— Infrastructure Leasing and Financial Services (IL&FS)—has assumed such large proportions that it threatens to derail the entire sector and throw into jeopardy a clutch of companies involved in asset financing and personal loans. The crisis in India’s NBFCs, triggered by the IL&FS debacle, has taken centrestage in the economic debate even as the tussle between the Union government and the Reserve Bank of India (RBI) on a host of issues, including refinancing for NBFCs, is heading for a climactic showdown at the central bank’s next board meeting scheduled on November 19.
The threat looms large, but sources indicate that the panic buttons haven’t been pressed yet on India’s thriving EMI economy—which funds everything from cars to homes to gold purchases in manageable equated monthly instalments, and even small businesses—and there’s optimism that the RBI will come up with new ways to pump more money into NBFCs. “NBFCs are currently not only in a crisis of liquidity but also of confidence,” says Abizer Diwanji, partner (financial services) at consulting firm EY India.
Until just about a decade ago, Indians thought of EMIs for homes and vehicles, but in the past five years, more and more have become cheerful participants in a deepening retail economy to buy jewellery, smartphones, luxury handbags, air tickets, furniture, etc.—and a lot of that boom has been funded by NBFCs big and small. You want it, you buy it. If the price looks steep for a straight purchase, an NBFC will finance it for you. You just pay an EMI— often interest-free. NBFCs aren’t as strict about creditworthiness and documentation before financing you. They aren’t as stringent as banks. They lend to segments that wouldn’t make the cut for a banking institution, they take on more risk and often lend without due diligence checks on the borrower. But they fund small businesses, which fuel the economy—from small transporters to traders or contractors.
There are over 11,000 NBFCs registered
` 1.5 LAKH CRORE NBFC REPAYMENTS DUE IN NOV. 2018
392 NBFC LICENCES CANCELLED TILL AUGUST THIS FISCAL
with the RBI across the country, which have revved up India’s consumer economy as retailers across sectors have latched onto the EMI bandwagon to lure the consumer. After IL&FS defaulted on payments to lenders and triggered panic in the markets, there is now speculation that the entire sector might cave in unless desperate measures are taken to keep it afloat. Several questions have been raised on the viability of this shadow banking sector, which has grown at around 20 per cent and now has a fat aggregate book of Rs 26 lakh crore.
The RBI has since tightened regulations and now, depending on who you speak with, you are warned or comforted about the state of NBFCs. These institutions work on short-term credit and nearly Rs 1.5 lakh crore is up for redemption this month. There is a clamour for the RBI to bail out the NBFCs. As Nilesh Shah, managing director of Kotak Mahindra Asset Management Company, says, “If a child jumps off the first floor, will you help the child heal first or slap him? Now is the time to bandage the child, then you can rap him.”
How the crisis unfolded
Like every other business, NBFCs have short-term and long-term cash requirements. They take long-term loans from banks as well as institutions by raising debentures. These loans mature, and additional loan disbursements need to take place. “NBFCs’ asset liability management is tougher than of banks,” says Diwanji. “They don’t necessarily match cash flows and there are always gaps. They don’t have fixed period receivables and fixed period payables, unlike banks who have savings accounts, which is floating cash.” As part of their regular business, these NBFCs keep borrowing shortterm money through commercial papers (CPs) of three or six months from mutual funds. With the IL&FS default, some mutual funds were left cash-strapped. “With the stock market going down, there have been more withdrawals from mutual funds. They have been trying to curtail more and more cash, and hence not giving out CPs,” adds Diwanji. This choked NBFCs of funds, and their disbursements slowed down. Growth suffered and owing to liquidity fears, the stock prices of these firms took a hit. Companies then began to sell subsidiaries to raise cash.
Shah says the banking system needs Rs 90,000 crore more to maintain its liquidity. And some NBFCs could be in trouble because of an asset-liability mismatch, where short-term funding is used to finance long-term assets. “It will be stupid to assume that the entire Rs 28 lakh crore will be impacted,” says a Mumbai-based analyst. While the government presented a grimmer picture, an RBI source clarified that “system wise, there is excess liquidity”.
A Crisil analysis of the liquidity position of the large non-banks—NBFCs and housing finance companies—it rates shows that they are “maintaining adequate liquidity buffer to manage mismatches, if any, in their assetliability maturity profiles”. Says Krishnan Sitaraman, senior director, Crisil Ratings: “In an environment where access to funding has become a function of market confidence, the quantum and quality of such liquidity cushion will be the key differentiator. The business
11,402 NBFCs REGISTERED WITH THE RBI AS OF MARCH 2018