NBFC Liquidity Crisis – Hype and Reality
by Shrutee K/DNS
Finance
Industry Development Council (FIDC) is a Self-Regulatory
Organization (SRO) cum Representative Body of the NBFCs registered with the
Reserve Bank of India. FIDC was formed
14 years ago, and is the recognized face of the NBFC sector. We have been
engaged in regular interaction both with Reserve Bank of India and Govt. of
India, which include pre-budget meetings and also important policy related
meetings with RBI. Almost all the leading NBFCs and a large number of small and
medium sized NBFCs are our members.
Reality Check: We
feel that the prevailing “Liquidity Crisis” in the NBFC Sector has been hyped
up to a level that it needs a reality check, in order to put things in the right
perspective.
Following
are the key points:
Hype
|
Reality
|
Defaults by IL&FS and DHFL represent the health of the NBFC
sector.
|
Housing Finance Companies (HFCs):
·
Are not NBFCs
·
Business
model entails long term lending(10 years and above)
·
Regulated
by National Housing Bank and not RBI
Long Term Financing NBFCs like IL&FS
·
There
are only 08 Infra Financing NBFCs out of a total of 9600 NBFCs
·
Five
out of these 08 are Govt owned
Typical NBFCs
·
Majorly
into asset based retail lending
·
Have
short tenure assets of 1-4 years
·
Small
ticket size
|
NBFC Sector has a major Asset Liability Mismatch issue
|
1.
Asset
Liability Mismatch is predominantly an issue only for long term lenders such
as HFCs and Infra Financing NBFCs and not for genreal NBFCs, since 25-30%
assets mature within one year.
2.
Some
of the NBFCs resorted to short term Commercial Paper borrowing to take
benefit of the interest rate arbitrage keeping unutilized banks credit line
as a cushion – which has been significantly corrected by March 2019
|
The current crisis is a contagion solvency issue
|
Nine months have passed since IL&FS
defaulted, without any NBFC defaulting.
NBFCs have fully met their liabilities, though restricted their lending. As such current crisis is more a growth
related issue and not a solvency issue.
|
NBFCs are over leveraged
|
As on 31st March 2019
·
Average
CRAR is 19.3% against the prescribed level of 15%.
·
Leverage
ratio is only 3.4%
|
NBFCs are subject to light touch regulation and there is a need to further
tighten regulation
|
1.
The
prime objective of the Revised Regulatory Framework issued by RBI in 2014 was
to harmonize regulation of NBFCs with banks and other FIs
2.
Asset
side regulation are almost at par with banks including prudential norms on
NPA classification
3.
NBFCs-ND-SI
have already migrated to Ind AS, while banks continue to follow the old
Indian Accounting Standards
4.
Following
key areas are well regulated :
-
Mandatory
Registration with RBI along with prescribed entry level
-
Minimum
Capital Adequacy (CRAR) of 15%
-
KYC
Norms and all other provisions of Prevention of Money Laundering Act, 2002
-
Code
of Fair Business Practices
-
Corporate
Governance
-
Prudential
Norms on Asset Classification (NPA Classification), Income Recognition and
Provisioning
-
Credit
Concentration Norms
-
Statutory
Liquidity Ratio (SLR)
-
Onsite
Inspection of books and accounts on annual / bi-annual basis
-
Offsite
surveillance– submission of Returns to RBI on monthly, quarterly & annual
basis
|
Prevailing liquidity crunch for NBFCs does not require any special
measures.
RBI has infused liquidity through the OMO and LAF route
|
Data compiled by FIDC shows : (Y-o-Y
basis)
·
Total
disbursements by NBFCs in Q3 of FY 19 dropped by 19%
·
Total
disbursement by NBFCs during Q4 of FY 19 dropped by 31%
Impact on key sectors which NBFCs cater
to:
·
Automobile
sales have been at record low level during the last three quarters
·
MSME
sector also suffered due to restricted credit supply by NBFCs
·
Liquidity
infused by RBI has resulted in funds with the banks.
·
Hesitation & Reluctance of banks to
fund NBFCs is the key issue.
|
Bank funding to NBFCs has not been impacted by the current crisis. Some
of the PSBs have aggressively voiced their willingness to buy out NBFCs
portfolio
|
1.
Banks
have withdrawn unutilized credit lines to NBFCs and shown reluctance and
hesitation to renew existing credit lines. Cost of borrowing from banks has
gone up – even AAA rated NBFCs are faced with increase in rates by up to100 bps.
2.
Portfolio
buyout is a “band aid” solution which does not result in growth.
3.
The data on bank credit to NBFCs
published by RBI includes exposure to Government owned NBFCs which results in
distortion of figures – RBI’s FSR dt. June, 2019 states that Top 30 NBFCs,
including Govt. owned NBFCs, account for more than 80% of the total bank
exposure
|
What We Seek From the Government/ RBI
Short Term Measures – Need Immediate
Action
The crying need of the hour is to
create a dedicated liquidity window for NBFCs through the banking
channels. The same may be provided for a period of one year. Precedence
may be drawn from a special repo window created by RBI in 2008 for banks
under the liquidity adjustment facility (LAF) for on lending to NBFCs.
Since 1999, RBI had allowed all
bank lending to NBFCs for on-lending to the priority sector, to be treated
as priority sector lending by banks. This gave a huge incentive to banks
to lend to NBFCs. While it ensured sufficient bank funding to NBFCs at a
reasonable cost, it also facilitated banks to meet their PSL targets.
However, this was abruptly withdrawn in 2011. The same arrangement may be
restored urgently.
For Small &Medium sized
NBFCs, eligibility norms for NBFCs for availing refinance from MUDRA
should be made favorable by:
Allowing all RBI registered
NBFCs to avail refinance
External Credit Rating
criteria may be replaced by prescribing some additional financial parameters to
be met, which may be more realistic and doable.
The cap of 6% on the
maximum spreads allowed should be done away with, since market forces ensure
that the rates are within acceptable limits
Systemically
Important NBFCs should be Allowed to Act as Aggregators by availing refinance
from MUDRA for on lending to small and medium sized NBFCs.
Long Term
Measures
Setup up a Permanent
Refinance Window for NBFCs
A
dedicated “Refinance window for NBFCs”, on the lines of National Housing Bank
(which provides refinance to Housing Finance Companies) has been a
long-standing demand of the NBFC sector. The Parliamentary Standing Committee
on Finance in their 45th Report dated June 2003 (relating to The Financial Companies
Regulation Bill, 2000) had recommended setting up of a new refinance
institution for NBFCs.
Establishment of
Alternate Investment Fund
An
Alternate Investment Fund (AIF) may be established to channelize institutional
funds to NBFCs.. Non-convertible
debentures (secured by hypothecation of business receivables of NBFCs) could be
subscribed to by the AIF for onward lending by NBFCs. These NCDs could be
administered by investor trustees who could take care of the interests of the
AIF and its constituents and would be subject to all extant guidelines in this
regard. The manner of constitution of the AIF and the sources of its funds
could be discussed further.
“On Tap” Issuance of
Secured Bonds/NCDs
NBFCs
have access to Non-Convertible Debentures (“NCDs”) having flexible tenure and
rates, both through the private placement (with restrictions) and public issue.
While private placements have severe restrictions on the number of investors,
the frequency of issue etc., public issue of bonds tends to be very expensive,
laborious and inflexible.
It
is proposed that NBFCs be allowed an on-tap facility for issuance of NCDs to
the retail market by making the offering of NCDs through an easy to operate and
less costly procedure, but with proper governance to provide investor
protection and comfort.
Government is taking steps to ease NBFC liquidity crisis.
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