The evolving landscape of NBFCs

The evolving landscape of NBFCs

Non-Banking Financial Companies (NBFCs) play a vital role in the Banking, Financial Services, and Insurance (BFSI) sector. However, the NBFCs have been in limelight post-IL&FS crisis. The flow of funds from NBFCs to the liquidity-starved real estate sector is expected to dry up further after DHFL’s recent downgrade. Focusing on the liquidity flow and credit risk in the market, Anupama Mehra of Elets News Network (ENN) explores the current scenario of NBFCs.

It is not very old that Lehman Brothers filed for bankruptcy in September 2008 for a debt of USD 619 billion in the US. The investment bank has assets of worth USD 639 billion was the largest case of bankruptcy in US history. Lehman collapse

The evolving landscape of NBFCshad a chain reaction worldwide leading to an erosion of USD 10 trillion in the global market in October 2008.

Though the world is more globalized now and the best auditors and advisers are available in data, but we are also not learning from liquidity/ credit crisis/ history of other countries as well as from our own like Satyam computers, IL&FS and etc.

The financial irregularities in the case of IL&FS came to limelight last year when the company failed to fulfill short and long term obligations of more than Rs 90,000 crores. The writing on the wall is more clear now as the Essel group is on the brink, Dewan Housing Finance Corporation Ltd. (DHFL) has defaulted, Eros International is under water, Jet Airways is struggling to revive or already grounded. The Reliance Anil Dhirubhai Ambani Group (ADAG) group is fighting hard to survive but is unable to sell its assets.

So, we have NBFC crisis on one side and Public sector (PSU) banks have already seen a push to the wall due to the alarming rise of Non-performing assets (NPAs). As per the Q4 earning results of PSU banks the operating losses stand at over Rs 50,000 crores and with the defaulting of more and more companies the NPA position of the banks is going to worsen.

Bloomberg data shows that 35 companies of NIFTY have shown a jump in debt at Rs 16.3 Lakh crores that is a 13 percent rise on year-over-year (YOY). Only four companies of NIFTY are debt free, which is not a healthy sign of the economy. Even though there is an improvement of the ranking of ease of doing business robustness of the economy, as per Medis report, but it appears that the financial crisis is building up day by day.

To improve the liquidity condition, the RBI has infused Rs 27,500 crore into the financial system through bond purchases. RBI Governor Shaktikanta Das has also explained to relook into the regulations and supervision of non-bank lenders.

Experts across the sector opine that the common man (Mango man) is unable to react and getting crushed in the liquidity crisis due to mismanagement of strong hands.

“IL&FS doesn’t represent NBFC or Housing finance companies (HFC). The crisis happened because of years of mismanagement. The model of IL&FS was an investment in infrastructures, projects like roads, bridges, highways, telecom. These projects will take 5-6 years and they will pay back in 20 years. They always had an asset liability management (ALM) issue but if the ALM was a risk they would have gone worst many years ago. ALM and Liquidity are interlinked that is if you borrow short or long there will be a mismatch. But IL&FS never faced a liquidity issue. IL&FS suffered because many of their projects got delayed because of environmental issues, clearance from the forest, government and etc,” says Sunil Gupta, Chief Executive Officer, ManiBhavnam Home Finance during a conference organised by Elets Technomedia.

However, in the wake of IL&FS issue, the Government of India took immediate steps in October 2018 and took control of the company to arrest the spread of contagion to the financial markets. A new board consisting of Kotak Mahindra Bank Managing Director, Uday Kotak and other experts in the field were constituted in place of the existing board.

Further, the Serious Fraud Investigation officer (SFIO) was assigned the job of investigation. It was reported in the media that management gave itself lavish salaries at the expense of public money. In the absence of adequate supervision by RBI or Shareholders or any claw-back provisions on remuneration, the management treated the company as its fiefdom.

The initial prober of SFIO has revealed that there were major lapses in Deloitte’s audit of IL&FS, also email trails has revealed deep-rooted connivance between former senior IL&FS officials and Siva Group Chairman as loan continued to be evergreened and recoveries delayed.

Top management of IL&FS had enjoyed foreign travels, private jets, booking of resorts, etc, as per the report. The charge sheet has been filed by SFIO in a special court in Mumbai and has accused 30 entities/ individuals of various violations under offenses.

Modifying credits and risks

The massive fraud of IL&FS which has shaken the economy of the entire country did not happen in a day or two. It is a serious connivance of top management & auditors, and also ignorance of RBI. Many are blaming RBI for doing nothing decisive for the NBFC when it announced its policy on June 6, when almost ten months have passed of IL&FS issue. Though RBI doesn’t regulate Housing Finance companies as banks have significant exposure to HFC, RBI in any case as a mandate to look after the financial stability of the entire country.

However, RBI issued a new framework on June 7 for the resolution of stressed assets, replacing the controversial February 12, 2018 circular for a wider class of lenders. The new norms leave it to the discretion of lenders and give them 30 days to start working on a resolution plan from the day of default.


“The scenario has changed post -IL&FS crisis. We are facing issues of liquidity from the bank’s side. The main challenge is of funding and on the operational side, managing the staff, you have done the policy, underwriting everything but if you don’t have an adequate staff it’s all going to fail.”
Sanjeev Yadav, Managing Director, Subhlakshmi Finance Pvt Ltd.

The new framework will enhance liquidity and give a boost to interim finance to the market, experts feel.

“The market has become really tough, but Reserve Bank of India (RBI) as a regulator has done quite a bit of effort. They are trying to inject liquidity into the system, they have also provided the risk weightage for banks for lending to NBFCs and recently they have merged the categories of NBFCs which are asset financing, loan companies as well as investment companies into a single category. So, the regulator is taking steps but liquidity is a big challenge,” says V G Suchindran, Chief Financial Officer, Veritas Finance.

Though RBI is trying its best to inject liquidity, the NBFCs are facing issues from the bank’s side. “The scenario has changed post -IL&FS crisis. We are facing issues of liquidity from the bank’s side. The main challenge is of funding and on the operational side, managing the staff, you have done the policy, underwriting everything but if you don’t have an adequate staff it’s all going to fail,” says Sanjeev Yadav, Managing Director, Subhlakshmi Finance Pvt Ltd.

In order to address the issue of liquidity crisis in totality, Government, RBI, SEBI (Securities and Exchange Board of India) has taken up a number of steps in this direction. In addition to the release of Rs 27,500 crore into the financial system through bond purchases, RBI Governor Shaktikanta Das has explained to relook into the regulations and supervision of non-bank lenders. Also, SEBI has tightened the rules for the credit rating agencies (CRAs) and has asked the entities to have a standardized operating procedure for tracking and recognizing defaults.

Further as declared by the former Governor of RBI Bimal Jalan, the government has appointed the Jalan committee on the issue of surplus funds with RBI, and they will submit the report by the end of June. With this fund, it is expected that Rs 1 to 3 lakh crores might be spared by the RBI for utilization by the government. It is hoped that with this fund the liquidity position will improve in the next two quarters.

With the Government and regulators taking major steps to improve the liquidity in the NBFC sector, we hope that another IL&FS crisis won’t happen in the future.




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