NBFCs, HFCs may get 1 year extension for restructuring loans: Report

Financially sound non-banking finance companies (NBFCs) and housing finance companies (HFCs) may be next in line to be permitted extension of the date of commencement of commercial operations (DCCO) of project loans for commercial real estate by another one year without downgrading the asset classification.

Official sources said that the Reserve Bank of India (RBI) extended this facility to banks after the recently concluded meeting of the Monetary Policy Committee on February 6 and NBFCs and HFCs may now be included in the scheme to allow completion of a larger number of viable real estate projects that are delayed for reasons beyond the control of promoters.

The move will not only bring NBFCs and HFCs at par with banks in treatment of loans given for restructuring of real estate projects without downgrading the asset classification, but also provide a big relief to both commercial real estate and residential projects that were delayed on account of regulatory issues.

It may be offered to companies such as LIC Housing Finance, PNB Housing and Shriram Finance which have largely remained unaffected from the present liquidity crisis in the sector following problems in IL&FS and DHFL.

As per RBI, commercial real estate (CRE) refers to all the real estate asset classes such as the construction of commercial buildings, IT buildings and even residential structures for which banks have lent loans to developers.

According to brokerage firm Emkay, the proposed extension of DCCOs to NBFCs and HFCs will only have limited impact on the sector, as very few projects of existing NBFCs/HFCs opted for the earlier one-year extension given by the RBI.

However, this can have a positive impact on NBFC/HFC stock prices that have been under some pressure off late.

The expected extension of the facility to NBFCs and HFCs may not be an unlikely move from RBI as even the previous circular on the same changes had been first made available to the banks and was later extended to NBFCs/HFCs.

Banks and NBFCs/HFCs already have one-year extension window available (based on the circular in 2015) for all CREs; however, the recent announcement after the MPC meeting provides an additional one-year window to banks, which is currently not available for NBFCs/HFCs.

NBFCs' gross NPA ratio rises from 6.1% to 6.3% in Sept: RBI report

Non-bank lenders witnessed stress in their asset quality in the first half of the current fiscal, with gross NPA ratio increasing to 6.3 per cent in September 2019 from 6.1 per cent in March, according to an RBI report.

However, the net NPA ratio of non-banking financial companies (NBFCs) remained steady at 3.4 per cent between end-March 2019 and end-September 2019, RBI's Financial Stability Report showed.

As at end-September 2019, the capital to risk assets ratio (CRAR) of the NBFC sector stood at 19.5 per cent, lower than 20 per cent as at end-March 2019.

The report said while the importance of NBFCs in credit intermediation is growing, the IL&FS episode brought the focus on the asset liability mismatches of non-bank lenders, which poses risks to the sector as well as the financial system as a whole.

To address this, the RBI introduced the liquidity coverage ratio (LCR) requirement for all deposit-taking and non-deposit taking NBFCs with an asset size of Rs 5,000 crore and above.

The new regulation mandates NBFCs to maintain a minimum level of high-quality liquid assets to cover expected net cash outflows in a stressed scenario.

NBFCs are required to reach LCR of 100 per cent over a period of four years commencing from December 2020.

"The non-banking financial intermediation space which took up a significant share in credit intermediation after the relative passivity of public sector banks due to their impaired balance sheets, continues to show signs of restructuring of their underlying business models," RBI Governor Shaktikanta Das wrote in the foreword of the report.

While credit markets are becoming more competitive following recapitalisation of state-run banks, market funding for NBFCs is getting more discerning based on prudential concerns, he added.

The report said NBFCs were the largest net borrowers of funds from the financial system with gross payables of around Rs 8,29,468 crore and gross receivables of around Rs 66,635 crore as at end-September 2019.

A further breakup of payables showed that 48.4 per cent of the funds were obtained from banks, followed by 26 per cent from mutual fund companies and 21.3 per cent from insurance firms, it said.

Letter to BS: NBFCs' financial indiscipline led to credibility crisis

This refers to “Financial sector stability & our cook Lilu-tai” (October 7). While financial intermediaries are sourcing money from those to save, the deployment of those resources must ensure the interest of those who contributed to the resources is safeguarded. Over a period of time, many banks, NBFCs and co-operative banks have deployed the funds imprudently and that resulted in loan-related frauds and bad assets. They have wilfully kept the financial scams under the carpet and cheated investors and depositors.

While these financial intermediaries are the key pillars of the Indian financial system, the non-observance of financial discipline by them have adversely affected the credibility of the financial system and has negatively impacted the sentiments of investors. The oversight of the supervisors and regulators proved ineffective in controlling the banking activities and is proving to be an impediment in the path of economic growth.

It is important to tighten the oversight by the banking regulator, besides making the various audits and inspections purposeful. It is high time the banking regulator directed NBFCs and co-operative banks to undertake asset quality review, besides re-examination of the compliance reports filed in response to the audits and inspections. Thorough cleansing of the books of these entities is crucial to ascertain their health and save the financial system.

Confidence crisis at home forcing NBFCs to cough up more for funds overseas

India's shadow banks are getting increasingly squeezed by a crisis of confidence at home, forcing them to cough up more for funds overseas. And that's just for the lucky ones.

The non-bank financing companies have struggled to raise as much abroad this year, as defaults in India's credit market spread after a shock failure by major shadow lender IL&FS Group last year. They've signed $1.5 billion of foreign-currency loans so far in 2019, down from $2 billion in the same period last year, according to data compiled by Bloomberg that excludes state-run lenders.

Average margins jumped to a three-year high of 118 basis points, compared with 95 for the deals signed in the same period in 2018, the data show.

India's slowest economic growth in six years has prompted predictions for deeper interest-rate cuts, but that's yet to translate into easier borrowing conditions at home for the shadow lenders.

The cash squeeze threatens a broader fallout, as the higher cost of funds is passed on to merchants getting micro loans and property tycoons looking to roll over debt. Authorities are trying to boost market confidence with measures including nudging commercial banks to purchase high-quality NBFC assets.

The overseas borrowings by NBFCs "is pertinent to boost buffers at a time when domestic liquidity is not easy to come by for the sector," said Ashwini Kapila, head of financial institutions group coverage at the Indian unit of Barclays Plc. "Some of these NBFCs are open to paying a premium to get this liquidity."

Foreign lenders are playing it safe and seeking to lend only to the top borrowers from the sector, especially those founded by the nation's largest business groups. 

That's not stopping more shadow banks from trying.

At least eight including Bajaj Finance Ltd, L&T Finance Ltd and Mahindra & Mahindra Financial Ltd, are seeking about $1.6 billion in offshore loan facilities, data compiled by Bloomberg show.

While the spate of defaults and rating cuts at shadow banks have dampened perceptions about the sector, bankers have been at work "explaining to global investors that not all NBFCs can be painted with the same brush," Kapila said.

Sitharaman's sops for NBFCs may perk up lending, ease liquidity stress

To further ease the liquidity stress in the non-banking sector and nudge them to revive their lending activities, Finance Minister (FM) Nirmala Sitharaman on Friday announced a slew of measures for non-banking financial companies (NBFCs) and housing finance companies (HFCs). The government hopes this will result in more credit support for purchase of houses, vehicles, and consumption goods.

The government has provided additional support of Rs 20,000 crore to the stressed housing finance companies from National Housing Bank (NHB). With this, the additional liquidity support for the HFCs from NHB has gone up to Rs 30,000 crore.

In the Union Budget last month, the FM had encouraged public sector banks (PSBs) to buy high-quality pooled assets of NBFCs up to Rs 1 trillion for which the government would provide a one-time six-month partial credit guarantee for the first loss of up to 10 per cent.

The Reserve Bank of India (RBI) had also chipped in by tweaking banks’ bond-holding norms. This will allow banks to borrow an additional Rs 1.34 trillion exclusively for buying such pooled assets and giving loans to NBFCs. The FM on Friday said this partial credit guarantee scheme will be monitored at the highest level in each bank. Through this, it is expected that many of the assets will get quickly pooled and NBFCs will receive the necessary liquidity. “NHB has already settled some of the issues. NBFCs are receiving money from the banks and are moving towards funding,” said Sitharaman.

Sanjaya Gupta, managing director, PNB Housing Finance, said “This will support growth and ease the liquidity crunch. HFCs will now get an additional Rs 20,000 crore from NHB. The initiatives have potential to kick start the real estate sector.”

The government has also permitted NBFCs to use Aadhaar-authenticated bank KYC to avoid repeating the same process when a customer approaches it for credit. This has been a long-standing demand. The necessary changes in the Aadhaar regulations and Prevention of Money Laundering Act rules will be made, the FM said.

“This will streamline the process and also reduce frauds,” said Raman Aggarwal, chairman, Finance Industry Development Council.

The government has also asked PSBs and NBFCs to fast-track their collaboration to provide credit to micro, small and medium enterprises, small traders, self-help groups, and micro finance industry client borrowers.

Consumer loans may be the next big headache for NBFCs: RBI report

Gross non-performing assets (NPAs) of non-banking financial companies (NBFCs) have risen from 5.8 per cent in 2017-18 to 6.6 per cent of their loans in 2018-19 even as net NPAs declined by 10 basis points from 3.8 to 3.7 per cent in the same period, the Reserve Bank of India’s (RBI’s) Financial Stability Report has said.

Moreover, the capital-to-risk weighted asset ratio (CRAR) of NBFCs hovered around 19.3 per cent as of March this year compared to 22.8 per cent in the same month last year.

With gross NPAs on the rise, the consumer loans segment may become a new headache for NBFCs.

NBFCs are facing the highest delinquency levels in all the sub-segments of consumer loans except for loans against property.

The report says: “A look at the evolution in delinquency levels in each of the segments shows that NBFCs as a group have been leading delinquency levels in almost all the sub-segments of consumer credit (except in loans against property where it stands a close second to PSBs) when uniform delinquency norm of 90 days past due (dpd) is applied”.

A major thing highlighted in the report is that the dependence of NBFCs on banks for funds is increasing whereas reliance on commercial papers and debentures has seen a decline after the Infrastructure Leasing and Financial Services (IL&FS) crisis.

The report said: “Bank borrowings to total borrowings have increased from 21.2 per cent in March 2017 to 23.6 per cent in March 2018 and further to 29.2 per cent in March 2019.”

During the same period, the dependence on debentures declined from 50.2 per cent in March 2017 to 41.5 per cent in March 2019.

The main sources of borrowing for NBFCs and housing finance companies (HFCs) are banks, mutual funds, commercial papers, and non-convertible debentures.

This means banks are compensating for the reduced market access for NBFCs amid the prevailing liquidity crisis. The report says the share of non-mortgage loans for the top five HFCs rose from 29 per cent to 46 per cent.

Consumer loans may be the next big headache for NBFCs: RBI report

Moreover, the stress test of NBFCs indicates 8 per cent of them won’t be able to comply with the 15 per cent minimum capital requirement and in the worst case scenario 13 per cent will fail to comply with it.

The sector came under stress after Infrastructure Leasing and Financial Services (IL&FS) defaulted on its debt obligation, exposing the asset-liability mismatch in the sector.

The top 10 NBFCs account for more than 50 per cent of banks’ exposure to the sector while the top 30 NBFCs (including government-owned NBFCs) account for more than 80 per cent of the exposure, the report said.

However, the report says over-reliance on bank funding makes NBFCs, especially housing finance companies, uncompetitive in financial products where the sector has to compete with banks and in such circumstances, NBFCs’ portfolio choices may tend to have an adverse selection bias.

Moreover, funding with private debt has implications for NBFCs’ profitability while inducing an interest rate mismatch in key product segments where NBFC products are (notionally) benchmarked to money market rates for competitive reasons.

The silver lining amid the crisis, the report says, is that after the IL&FS episode, the sector has come under greater market discipline. Better-performing companies continue to raise funds while those with asset-liability problems have been suffering due to high borrowing costs.

The report emphasised the need for greater surveillance of large NBFCs and HFCs because the failure of any of these will cause losses equivalent to that of the failure of a big bank.

NBFCs may see profit margins squeezing from RBI draft liquidity norms

India’s shadow banks are likely to see a further squeeze on their profit margins after the Reserve Bank of India signaled it will tighten liquidity requirements to bring them in line with the country’s more closely regulated commercial banks.

Instead of providing a much-expected liquidity window to non-bank finance companies via the regular lenders, the central bank took a tougher stance on Friday by issuing draft guidelines requiring most NBFCs to set aside a liquidity buffer by investing in high-quality liquid assets, primarily sovereign bonds.

“The regulator won’t bail out any particular company but will ensure the NBFCs are more disciplined and strong at the cost of some short-term pain,” said Avinash Singh, research analyst at SBICAP Securities, a subsidiary of State Bank of India. If implemented, the draft guidelines could hit the NBFCs’ margins and business growth, Singh added.

India’s shadow lenders have been under pressure since last year, when a series of defaults by Infrastructure Leasing & Financial Services forced the government to intervene and exposed weaknesses in the sector. Since then, the banks and mutual funds which provided funding to the NBFCs have reduced their exposure, creating a cash crunch which caused the shadow lenders to sell assets and restrict new loans.

Average yields on top-rated five-year bonds issued by NBFCs climbed 16 basis points in April, the biggest monthly gain since June 2018.

The government of Narendra Modi, which received a sweeping new mandate in elections last week, is also signaling a tough line with individual shadow lenders, while not ruling out measures to avert a credit crunch.

“Should there be a need to address the contagion we will do everything that is necessary to keep the credit market functional,” said Sanjeev Sanyal, principal economic adviser at the Finance Ministry. “However we have to be aware of the moral hazard of intervening in every disruption. Otherwise, we will end up perpetuating and encouraging asset-liability mismatch,” Sanyal added.

RBI risk draft may hit NBFCs; FIDC asks to address liquidity problem first

The Reserve Bank of India’s (RBI’s) draft guidelines on liquidity risk management for non-banking financial companies (NBFCs), announced on Friday last week, could dilute the latter’s profitability in the near term, albeit marginally.

Though in draft form, the guidelines were anticipated by market/industry experts and are in the right direction because the sector has been reeling from liquidity problems after the IL&FS crisis in September last year.

An initial reading of the guidelines indicates two factors — potential rise in borrowing cost and lower returns on investment book — could hit the spread of NBFCs.

The spread is a profitability measure of lenders.

“NBFCs that were chasing profitability by borrowing in the short term where cost is lower to finance longer-tenure assets could see some pressure on margins in the short term. This practice will go once these guidelines are finalised,” said Lalitabh Srivastava, associate vice-president, Sharekhan.

According to the draft guidelines, NBFCs have to disclose their asset-liability management (AML) data in more granular ways (weekly, 8-14 days, 15-30 days, etc.) and the cumulative ALM mismatch is allowed up to 10 per cent for weekly and 8-14 days each, and 20 per cent for 15-30 days.

An ALM mismatch occurs when cash outflows exceed cash inflows in a particular period.

Many large, listed NBFCs have started lowering their exposure to short-term borrowings such as commercial papers and have a satisfactory asset-liability management (ALM) profile.

“Most liquidity measures announced were practised by well-managed NBFCs. But there were no regulations to supervise through the ALM committee. If these guidelines are finalised, it will be strict monitoring of the NBFCs’ liability side and everyone has to follow proper procedures,” said Umesh Revenkar, managing director and chief executive officer, Shriram Transport Finance Company.

“Every NBFC is carrying additional cash now. So I don’t see any impact on profitability and earnings of NBFCs,” he added.

Further, the adoption of the “stock” approach through liquidity ratios could mean more cautious use of short-term borrowings, warranting a rise in long-term borrowing cost and the margin pressure. This apart, the regulator has defined “high quality liquid assets” (HQLA) for calculating the liquidity coverage ratio (LCR). This could dilute the yield earned on investments.

RBI risk draft may hit NBFCs; FIDC asks to address liquidity problem first According to Anil Gupta, vice-president and head of financial sector ratings at ICRA, most big players do maintain on-book liquidity. However, those who have not been doing so could see a negative impact on spread. Also, going by components of the HQLA, the return on investment could be lower than their borrowing cost.

NBFCs could undertake some measures to mitigate the expected impact by increasing fee income or upward price revisions of their products.

However, given the competitive pressure, how much of the potential additional borrowing cost the NBFCs can pass on to customers is a question. Gupta said NBFCs’ ability to meet 100 per cent LCR should be better than that of banks, given the fact that the former largely have liabilities that are not payable on demand.

Thus, the five-year time frame given to NBFCs to meet 100 per cent LCR can be shortened.

Raman Aggarwal, chairman, Finance Industry Development Council (FIDC), said the RBI was prescribing a liquidity ratio when liquidity was a challenge. “It is a kind of situation where the patient is suffering from pain and instead of giving him\her relief from pain you are prescribing the plan for the future.”

The first task is to make liquidity available and then work on how finance companies manage it and prescribe norms, he said. The FIDC will give a point-by-point assessment and suggestion to the Reserve Bank of India soon.

RBI rules out credit line for NBFCs, discusses revised bad loan circular

The Reserve Bank of India (RBI) board on Tuesday suggested not extending a credit line to struggling non-banking financial companies (NBFCs) because it felt there was no systemic liquidity issue but there were solvency concerns in some large entities.

The board, headed by RBI Governor Shaktikanta Das, met in Chennai and discussed the NBFC crisis as well as a revised circular that would replace the controversial “resolution of stressed assets” framework released by the central bank on February 12, 2018.

The RBI is working on a liquidity framework for the NBFC sector and that may be released soon. Though an asset quality review (AQR) is not on the cards for NBFCs, the board was informed the central bank had called the management of large NBFCs and asked them to submit plans, with timelines, for capital infusion and asset monetisation.

The NBFC liquidity issue was discussed at length in the meeting “but the liquidity is enough in the system”, a source said.

The central bank is keeping a tab on the liquidity position of these firms on a monthly basis and recently asked NBFCs with assets over Rs 5,000 crore to appoint a chief risk officer.

On the revised stressed assets resolution framework, it was decided that the RBI would not force banks to take stressed assets to the bankruptcy court but would “incentivise them” through revised norms.

“The reading from the Supreme Court judgment is that banks cannot force a company to the National Company Law Tribunal (NCLT). But if they don’t do it, banks may be asked to make steep provisions,” said a person privy to the discussion.

A board member expressed displeasure on the definition of default.

However, the central bank maintained it was not willing to change the definition, which will continue to be as it is — from day one of failure to repay the loan.

“This provision on default may remain intact in the new circular,” said the source.

The original “resolution of stressed assets” framework created a huge rift between the government and the RBI, and perhaps led to the exit of Urjit Patel as governor.

The framework had said accounts in default of Rs 2,000 crore and above could be taken for a resolution process and if that did not fructify, the banks could then send the companies for insolvency proceedings. Importantly, even a day’s delay in servicing loans was termed default.

The Supreme Court in early April ruled that for each account the RBI would have to take permission from the Centre before allowing banks to invoke insolvency rules.

The circular fell through on technical grounds and the RBI had to go back to the drawing-board for a revised one.

The board discussed “the medium term strategy document, covering, inter alia, the mission statement and the vision statement”, the RBI said in a release on its website.

Sources say the Vision 2022 plan, called Utkarsh 2022, which would start on July 1, focuses on six areas including financial inclusion, financial stability and sustainable growth. The broad contours of the vision were discussed at the board meeting and the draft policy would be presented at the next board meeting, said sources.

The board discussed creating a specialised supervisory and regulatory cadre within the RBI to strengthen the supervision and regulation of commercial banks, urban cooperative banks, and NBFCs.

The 576th board meet was attended by Deputy Governors N S Vishwanathan, Viral Acharya and B P Kanungo and other senior officials of the RBI. Other directors of the central board present were Bharat Doshi, Sudhir Mankad, Manish Sabharwal, Satish Marathe, Swaminathan Gurumurthy, Revathy Iyer and Sachin Chaturvedi.

Subhash Chandra Garg, finance secretary and economic affairs secretary, and Rajiv Kumar, Department of Financial Services, were present as government directors