The sudden outbreak of covid-19 pandemic that disrupted the entire world and their respective economies is slowly witnessing some positivity with the vaccination drives. India, in particular, which is running the biggest vaccination drive in the world, is attracting a lot of eyeballs as its economy is catching momentum. Non-Banking Financial Companies (NBFCs) are playing a very important role by contributing to this growth and supporting the MSMEs. Sharing his views on how the expanding role of NBFCs are supporting the economic transformation in India, post-COVID Raman Aggarwal, Co-chairman, Finance Industry Development Council recently shed light on several significant aspects pertaining to the sector with Elets News Network during an exclusive interaction hosted during the 9th NBFC100 Tech Summit.
Excerpts of the Address:
I have always been saying that NBFCs, undoubtedly are the ironman of the financial service sector and have seen many challenges in the past.
I think COVID, as they say, was a black swan event or once-in-a-lifetime event obviously because this affected each and every aspect of, each and every business of, each and every country, each and every part of the world.
So, this was a very unique, potentially damaging kind of challenge which we all faced but we are fortunate enough today now that the vaccination drive is going on. I think things are slowly falling into place and let me tell you that when this whole thing started and the news of the outbreak broke, we at FIDC and the NBFC sector as a whole got worried because the worst affected segment of the society due to the lockdown were the ones whom NBFC catered to, as they were our borrowers, whether it was small type shopkeeper, entrepreneur, a three-wheeler driver or a truck operator.
So, all these people were ones whose livelihood literally came to stand still and it was a very worrisome situation and for once we were worried that’s real catastrophe situation is going to happen and it is going to be very challenging for the NBFC sector but as things rolled ou,t I think like I’ve always said, NBFC because of the key mantra which we always follow of maintaining regular contact with the borrowers even in this difficult times really paid off.
Today, as everything is unlocking and the economy has started moving and our Indian economy is now racing and heading towards a good path, NBFCs are now in a better position I would say. There are figures that the Reserve Bank of India (RBI) has put up which clearly lay strength towards what I’m saying. I am told that NBFCs in terms of the collection are almost at the pre-COVID levels and the quality of the assets in RBI’s own terms, although has suffered marginally, continues to be quite resilient and robust. I think this is something which really good the sector.
Now, as the sector has always drawn a lot of attention and decent market developments happened such as the leading vaccine manufacturer getting into the NBFC space and we saw Adar Poonawalla buying controlling stake in one of the leading NBFCs, Magma Fincorp.
We saw Brook Stone Investment in IndoStar Capital Finance Limited. Then very lately we saw KKR India Financial Services merging with InCred. These are some of the many developments that once again revived the NBFC sector and like I said NBFC sector has always been the centre of attraction and a lot of foreign investment does come in.
I think this really puts things in the right perspective and the NBFC sector once again is all set to go and play a very important and expanded role going ahead.
So, if you look at during COVID times when the government of India came up with stimulus package and this whole vision Atam Nirbhar Bharat Package which was announced and we saw the finance Minister clearly laying down the vision for NBFCs because government fully realizes that NBFC’s potential as a growth factor to the economy, especially when it comes to funding MSME and funding bottom to the pyramid.
So, I think they were a slew of measures in terms liquidity were announced and even on the vision of 5 trillion economy, there is a clear role for NBFCs as I said NBFCs are pivotal in providing the last mile credit delivery to the unbanked and underbanked segment of the society across the country.
Even during these challenging times, World Bank has sanctioned a loan of 750 million dollars to the Indian Government for the development of the MSME sector in India. I was involved in that project with the World Bank and I am happy to share that in their report World Bank identified three key pillars going ahead for the development of NBFC. One of the three pillars was funding by NBFCs. So, I think the World Bank clearly recognized and has laid down the path for the NBFC to play an increasing role in funding the MSME going ahead.
Similarly, we even saw IMF jumping when its own projection of the GDP which varied time and again repeatedly pointed about the liquidity crisis with the NBFC sector and need to address it. They said NBFC is an important part of the financial system. So, it’s not only the Indian government, or Indian bodies, even the international apex bodies like World Bank and IMF which recognize the role of NBFCs and have underlined the important role of the sector in their reports.
Furthermore, the Reserve Bank of India came up with a very important and comforting message and I should take this opportunity on the behalf of NBFC sector to really put up the most sincere thanks and appreciation to both of honorable finance Minister and RBI for coming up with a lot of measures which really helped in this crisis time.
So, RBI coming up with a liquidity measure through the TLTRO window, TLTRO one, TLTRO two are the steps that we are thankful for. RBI even went out to the extent of carving out that at least 50% of the fund should go to the small and medium NBFC’s. So, it was a very important step.
Then they came out with the latest TLTRO and in the last policy rate announcement, RBI has announced the list of eligible sectors which can avail funding from banks using the on tap TLTRO and NBFCs has also been included in that list.
In addition to this, RBI came up with extending the window of bank lending to NBFC for on lending to priority sector as PSL for bank then RBI also came up with measures to benefit in terms of asset classification in these difficult times. As part of industry demand, RBI came up with a one-time restructuring scheme where NBFCs are very much part of it and this played a very important role.
Another flagship scheme, which GOI rolled out was the 3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for the MSME segment and there also NBFCs have continued to play a very important role and you have seen the figures although initially there were some hiccups in the scheme of thing individual were not included.
For example, a lot of individual runs the business of their own names and don’t create a separate entity such kind of borrowers were ineligible under ECGL but we at FIDC pointed this out to honorable Finance Minister and we were happy that immediately that was rectified and circular was issued to include such individual borrowers.
So, all these measures really helped us in not only providing the much-needed liquidity but also ensuring a good continued path for the NBFC sector. Having said that let me also point out that while all these measures have been taken still the challenge for liquidity for a large number of small and medium NBFCs continue and that’s because the issue we have been discussing that the credit rating is often made the eligibility and that needs to be rectified and I am sure going ahead there will be measures taken and these will be sorted out and we will see the liquidity situation even for a large number of small and medium NBFCs getting sorted out and addressed to a great extent.
Among these discussions, we also unfortunately because of this crisis period saw challenging times for some of the banks. We saw the bank failures of YES bank, PMC and we are also witnessing one or more Co-Operative banks going down under and under this entire scenario, came the RBI’s discussion paper for a revised regulatory framework for NBFCs.
RBI put up the discussion paper saying that we proposed to totally revise the regulatory framework and they asked for feedback. We sent our feedback now we are awaiting the final guidelines. so, what RBI is proposing going ahead to follow what they are calling as Principle of Proportionality when it comes to regulation. I think it’s a very logical step to do because the tightness of the regulatory regime will be related to the size of your operation.
So, obviously, if you are small you will be subjected to fewer regulations but if you are big you’ll be subjected to the tightest regulation. So, that RBI came up with the suggestion of putting NBFC in 4 layers- the base layer, the middle layer, the upper layer, and the top layer. Before I came to detail it’s a pyramid kind of a structure but the top layer as they are calling a red zone that going to be kept empty and that is kept reserved for any NBFC which is under some kind of stress or facing some kind of a challenge. Now, this need not related to fraud only but could be circumstantial stress.
So, during the course of offsite and onsite surveillance which RBI does if it finds some of the NBFC is in stress and it is big enough in size to cause ripples in the system such NBFCs will be put in the top layer and subject to almost 24×7 kind of surveillance and guidance by RBI that is the top layer. Now coming to the base layer as per the revised paper, RBI proposes to increase the entry-level of the NBFC so, today if I have to set-up a new NBFC, I just need 2 crore of capital. Now this figure, RBI proposes to increases to 20 crore for the existing player who still does not have a fund or net income, below to the 20 crore are given 5 years of time to reach that level.
I think this too harsh and we in our presentation requested this 20 should be brought down to 10 crore. Going by Housing Finance companies and considering the current scenario which will be difficult for new NBFCs to put in that much amount of capital. I think 10 crore could be logical. Another change that they are proposing is that the definition of systemically important in NBFC will be changed. As of now, all deposit-taking NBFC are systemically important but for non-deposit taking the current rule is if you are in the size of 500 crore or above then only you are systemically important they proposes to increase the 500 crore to 1,000 crore and that is where the definition of NDSI, non-depositing systemically important will get changed other point for base layer for small NBFC that they are saying the base layer will be non-depositing taking NBFC below 1,000 crore who are not systemically important. So, they will be in base layer.
And, let me tell you out of 9,600 odd NBFC registered today more than 9,100 will fall in the base layer so, these are companies are very small, asset size is below 1,000 crore they don’t accept deposit more than 9,100 will be in base layer. For the base layer today also if you are a non-deposit-taking company not systemically important the rule is that the NPA norms for you are 180 days not 90 days default. This RBI proposed to change and say that bring it also to 90 days it will be now across the board for all NBFC’s now it will be for 90 days which is also a case for banks. This is for the base layer, for middle layer comprises of systemically important for non-depositing NBFCs and all depositing taking NBFCs what RBI is proposing is that such companies the credit norms will be related to tier 1 capital not NOF. As of now how much you can lend to 1 particular group, a particular entity is restricted gap as of the percentage of your NOF instead of NOF it will be now kept as tier 1 capital so, that the limit will get reduced.
Then the other proposal for the middle layer is to create and have a mandatory Chief Compliance Officer.
All the NBFCs in the middle layer will have to have a chief compliance officer who will be in charge of all regulatory norms not only RBI regulations all other regulations that he/she shall be responsible for. Currently, as per the Companies Act, you need to rotate the auditors after 5 years for NBFC, for NDSI you need to change the partner of the auditor after 3 years. Now RBI is going to change now is that after 3 years need to change the auditors so, the rotation of auditors is 3 years after the cooling period of another 3 years to reappoint the auditor the cooling period will apply these are some changes.
They are also proposing companies have to follow all the core banking solutions. So, CBS will be mandated for the middle layer. The upper layer which is going to be the most interesting layer will comprise 25 to 30 NBFCs in terms of size. These NBFC will be subject to a regulation which will be totally power with banks. So, all regulatory regimes will be similar to the upper layer with banks and then such NBFC will be given an option to convert into banks.
So, let me clarify it’s an option because I saw some section of the media reporting that is going to mandatory. It is going to be an option if you are going to be in an upper layer either you can continue to be an NBFC and subject to regulation which will be just similar to banks or you’ll have an option to convert yourself into a bank.
That is going to be a very interesting scenario as things really look up and I hope we don’t see although we are witnessing again the urge of some cases in part of the country the vaccination drive in full swing, I hope we will soon come out from the pandemic scenario. Going ahead, I see a very exciting time for NBFCs. The whole world is looking towards India and the economy is expected the people are putting all kind of alphabets like V-shaped, W-shaped but one thing for sure that Indian economy is going to grow to a very rapid pace and there NBFC will have a very important role to play equally exciting is keeping pace with the scenario. The regulator has also come up with a new framework for regulations. So, things are going to be interesting, exciting and I am sure this sector has a lot of new attractions both in terms of investment and technology because Fintechs is playing a very important role where Elets Technomedia efforts need to be appreciated.
Watch the complete session here: