Allaying fears over liquidity crisis for finance companies, the country’s largest lender, State Bank of India, said there is no concern over liquidity due to their cash position and availability of committed lines, adding that the bank is taking due care on quality of its exposures to finance firms.
Not to be caught off guard, lenders are having a relook at exposure and any risk from finance firms after default by Infrastructure Lending & Financial Services (IL&FS) and its lending arm. The volatility in the market for shares and bonds issued by non-banking finance companies (NBFCs) has set in caution amongst lenders, senior bankers said.
Banks have been dispensing loans to finance companies at a fast pace (40 per cent year-on-year growth till July 2018).
The outstanding bank credit to finance companies stood at Rs 4.73 trillion in July 2018 as against Rs 3.37 trillion in July 2017, according to Reserve Bank of India data. However, loans to finance companies have declined by 4.6 per cent from Rs 4.96 trillion in March 2018.
Last week, the ongoing crisis at IL&FS created a panic and triggered the sell-off in DHFL and India-bulls Housing stocks, as it was feared that an ‘IL&FS-like’ situation was emerging across
NBFCs. Besides direct loans, banks also have a substantial investment in commercial paper and debentures — floated by finance companies. Head of risks at a private bank said the concern over developments, is natural. But there is no need for Panic and fear. Banks will be more discerning in lending to finance companies.
Pricing will change (read money will become costly) for lower rated finance companies. Some moderation in the pace of lending to NBFCs may also happen, he said.
State Bank of India Chairman Rajneesh Kumar in a statement said that the SBI lends support to NBFCs in private and public sector within the regulatory policy framework and will continue to do so.
In fact, the recent regulatory guidelines on the co-ending model open up further opportunities for collaboration between the SBI and non-deposit taking NBFCs to increase lending to priority sectors.
Bankers said lending to finance companies is a substitute for direct lending when the pace of credit growth is tepid (low). It is seen as a less risky proposition to lend to a relatively better placed borrower (finance company in this case), as the probability of defaults is lower.
Banks are able to manage (grow) balance sheet and earn some income. It gives better earning than what can come from deploying money in instruments like treasury bills. The only drawback is that there are no risk weight benefits for lending to finance companies as they carry 100 per cent risk weight.
ICRA in its report on NBFCs in June said the share of bank funding to NBFCs started increasing from Q3 FY2018 after witnessing a steady decline during F2017 and April-September 2017 (H1Fy18). Bank credit to NBFCs witnessed a sharp increase in March 2018 as it jumped by Rs 1 trillion over February 2018 levels. Bank credit outstanding to NBFCs grew by 27 per cent year-on-year in March 2018.
Bank credit to NBFCs has been increasing since Q2 FY2018, largely mirroring the increase in bond yields, while the marginal cost of fund-based lending rate (MCLR) from banks remained largely stable during this period, ICRA added.
The entire contents of this article are solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation by the Author. Compliance Calendar LLP and the Author of this Article do not constitute any sort of professional advice or a formal recommendation. The author has undertaken utmost care to disseminate the true and correct view and doesn’t accept liability for any errors or omissions. You are kindly requested to verify and confirm the updates from the genuine sources before acting on any of the information’s provided hereinabove. Compliance Calendar LLP shall not be responsible for any loss or damage in any circumstances whatsoever.