India Today - - UPFRONT -

The gov­ern­ment has fi­nally stepped in to sup­port the bat­tered non-bank­ing fi­nance com­pa­nies (NBFCs) with a Union bud­get pro­posal en­cour­ag­ing pub­lic sec­tor banks (PSBs) to buy their pooled as­sets. It has de­cided to pro­vide PSBs a one-time, six-month partial credit guar­an­tee, amount­ing to a to­tal of Rs 1 lakh crore, for the first loss up to 10 per cent for the cur­rent fi­nan­cial year. This life­line thrown to the NBFCs was much needed be­cause the sec­tor plays a key role in driv­ing con­sump­tion de­mand in the econ­omy, es­pe­cially mort­gages, ve­hi­cle and con­sumer durable loans as well as sup­port­ing small and medium en­ter­prises hit by de­mon­eti­sa­tion and GST. This comes at a time when in­vest­ments and ex­ports, the other GDP growth driv­ers, are lag­ging.

Se­cu­ri­ti­sa­tion or pool­ing of as­sets is a well-ac­cepted prac­tice in the bank­ing in­dus­try to buy out the re­tail port­fo­lios of NBFCs. Un­der the pro­posed scheme, an NBFC sells a pool of as­sets (say, a set of af­ford­able loans or loans in a cer­tain cat­e­gory or ge­og­ra­phy) to a PSB in re­turn for immediate pay­ment. In the bar­gain, the PSB picks up se­cured, in­ter­est-pay­ing re­tail as­sets, while the orig­i­na­tor NBFC gets money to re­de­ploy in fresh loans. In ad­di­tion, the NBFC earns a fee in­come for col­lect­ing EMIs and main­tain­ing the loan ac­count. “We have never had an is­sue with pooled as­sets bought from NBFCs in the past,” says Ra­jki­ran Rai, manag­ing di­rec­tor at the Union Bank of In­dia. Rai adds that the non-per­form­ing as­set (NPA) level in pooled port­fo­lios is very low.


While the new in­cen­tive will en­cour­age banks to buy pooled as­sets, the buy­outs are not en­tirely risk-free. The Re­serve Bank of In­dia (RBI) and PSBs, al­ready re­cov­er­ing from as­set qual­ity shocks, need to be very care­ful as these port­fo­lios are built dur­ing the good times. Since NBFCs lend to cus­tomers who are typ­i­cally less cred­it­wor­thy than bank cus­tomers, banks need to be duly dili­gent about the pooled as­sets and the NBFCs.

NBFCs have suf­fered big losses in the past. The 2008 fi­nan­cial melt­down wiped out many NBFCs dol­ing out small-ticket-size per­sonal loans. Sim­i­larly, the mi­cro­fi­nance in­sti­tu­tions (MFI) cri­sis that hit Andhra Pradesh in 2010 re­sulted in huge losses.


Un­der the bud­get pro­posal, the pooled as­sets have to be rated by a rat­ing agency. Bankers say there are prac­ti­cal dif­fi­cul­ties in rat­ing a large pool—it is time-consuming and rat­ing the ac­counts en­tails a cost. “We can rate a sam­ple within the pool,” sug­gests a banker. If the RBI de­cides to go by a cor­po­rate en­tity’s rat­ing, there are ex­ter­nal ex­perts who ques­tion the cred­i­bil­ity of rat­ing agen­cies. This is be­cause some highly rated in­vest­ment­grade com­pa­nies have de­faulted in the re­cent past.

The other cri­te­rion is that only fi­nan­cially sound NBFCs be el­i­gi­ble to sell pooled as­sets to PSBs. Cur­rently, how­ever, there are no cri­te­ria in place to de­ter­mine fi­nan­cial health. The RBI is likely to spec­ify con­di­tions, such as the prof­itabil­ity record, cap­i­tal base, low NPAs and a rea­son­able bal­ance-sheet size.

The NBFC sec­tor saw big growth in the past 4-5 years be­cause PSU bank bal­ance-sheets were in a mess. A for­mer chief eco­nomic ad­vi­sor had sug­gested an as­set-qual­ity re­view of NBFCs, sim­i­lar to the RBI ex­er­cise done for banks. The bank­ing sec­tor has still not re­cov­ered from that shock. “The as­set qual­ity risk shouldn’t trans­fer to banks from NBFCs,” cau­tions an ex­pert. Banks will need to de­vise a strat­egy for the kind of as­sets they buy since the gov­ern­ment guar­an­tee comes for only the first six months. Some say an as­set cov­er­age of Rs 1 lakh crore won’t be enough for the NBFC sec­tor as the liq­uid­ity re­quire­ment is much higher. But a banker favourably dis­posed to the gov­ern­ment ini­tia­tive says: “We should look at the in­tent of the gov­ern­ment rather than the [partial credit guar­an­tee] amount.”

The pro­posal isn’t risk-free. Banks would be well ad­vised to do due dili­gence re­gard­ing NBFCs and their pooled as­sets

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