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    RBI eases bank lending limits to NBFCs: Here is what experts have to say

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    RBI eases bank lending limits to NBFCs: Here is what experts have to say

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    The Reserve Bank of India (RBI) on Friday eased lending norms related to certain non-banking finance companies (NBFCs) as liquidity concerns in the sector persisted and markets continued to question the viability of some of the firms following the IL&FS debacle.

    The Reserve Bank of India (RBI) on Friday eased lending norms related to certain non-banking finance companies (NBFCs) as liquidity concerns in the sector persist and markets continue to question the viability of some of the firms following the IL&FS debacle.
    The central bank  said it would allow banks to allocate up to 15 percent of their lending to NBFCs that do not finance infrastructure projects, up from an earlier limit of 10 percent. The move is effective up to December 31, RBI said in a statement.
    The relaxation in lending norms by RBI follows worries over tightening credit lines to NBFCs after a series of defaults at India's Infrastructure Leasing & Financial Services Ltd (IL&FS), spooked markets and led to a major sell-off in the stocks of many NBFCs.
    Earlier this month, the Indian government stepped in to take control of IL&FS saying it feared its collapse would cause "catastrophic" damage to the financial markets and the economy.
    CNBC-TV18 caught up with G Padmanabhan, non-executive chairman, Bank of India and former ED, RBI, Lakshmi Iyer, CIO - Debt at Kotak Mahindra AMC, Samir Jasuja, co-founder, Propequity.
    The step of increasing liquidity, in principle is that the right thing to do?
    Padmanabhan: In such a situation, I think in principle all that the central bank can do is to signal. I do not think the RBI can work out to the last pie, what is the liquidity shortage and provide that kind of liquidity. I do not think any central bank would do that.
    So the central bank’s stand is a signal saying that we are ready to stand by in case there is a problem and what is perhaps a limited issue, let us not blow it out of proportion. So the backstop is here. I think that is the important signal that RBI has given today. To my mind, it is a very important step.
    As someone who has watched this from the mutual fund end and the trepidation that you guys had to pick up housing finance companies (HFC) paper or NBFC paper, has some part of that fear gone because RBI is allowing the banks to give more liquidity?
    Iyer: I think the fear factor was anyways receding specifically post the monetary policy decision of status quo and rupee liquidity coming back to the system in a staggered manner getting accentuated by open market operations (OMO). Now with this announcement today, I think the extent of fear is only further reducing.
    Definitely we need to wait and watch how banks exactly execute this thing because what we hear is that it is not going to happen overnight, some of them also want to take their board approvals, etc... but for that I think it is definitely a good measure which will certainly a step in the positive direction -- though the lending might still be selective from the mutual fund fraternity.
    The calculation is that you can release money from high quality government securities to the extent of 0.5 percent of total deposits. The simple math would be around Rs 50,000 crore. Do you think banks will be willing to lend so much or even half that much to NBFCs?
    Padmanabhan: Honestly I think they will be much more selective in today picking up the people to whom they have to lend. They will obviously do a much closer scrutiny to make sure that the kind of problems that is hitting the sector today, does not get on to their books. However, having said that, I think the important fact is there are limited kind of issues that is there and today we can pick up companies which probably have much better books and which is not getting sort of pulled into the problems because there is a general negative sentiment all around.
    I would say in one word what this could achieve, maybe the banks could be more forgiving than the capital market. So probably that would make sure that the liquidity situation stabilises a little more because if it is a question of a complete stoppage of your rollover possibilities, then what if the limited problem could burgeon into a much bigger issue. That is what the central bank is trying to address.
    I just wanted to point other data. If you looked at the RBIs data on sectoral composition of bank loans, I was looking at it over the past 18 months when the initiative shifted to NBFCs. Bank lending to NBFCs was Rs 3.9 lakh crore in April of 2017. April of 2018 it has risen to Rs 4.96 lakh crore; that is a rise of 26 percent. However, when I looked at the August number, it was Rs 4.8 lakh crore. It had fallen by about Rs 10,000-20,000 crore. Was there a realisation among the banking sector that they were already overexposed in April and therefore do you think they will pick this signal?
    Padmanabhan: There are two issues. I think at least for a bank like mine, we were constrained in our lending because of our prompt corrective action (PCA) and all. So although we were looking at the sector as a possibility, there were certain constraints. However, I think over a period of time it is also a fact that particularly for short-term lending, these companies had moved away and moved more into the capital market.
    Now, in retrospect, having spent 3.5 decades in the central bank, I would not say that they have to look at each of this company very closely, but their boards should have been extremely conscious about what is the kind of asset-liability mismatch (ALM) that is getting built up over a period of time.
    It is that in this business I think the ALM is something which is there but the important point that needs to be ensured is that is it sustainable and particularly when the market is turning, the sentiment in the market is turning, is it something which could become an issue. I think that is probably where we were sort of catching up rather than being ahead of the market.
    To come to the other side, what has been the reaction of the bond market itself? You spoke of the many positives that the RBI has done, the fact that it did not hike rates, that it has announced proactively a fairly giant OMO in the face of an exchange rate problem and thirdly the measures announced in terms of releasing more space, first that LCR cut and now a little more of liquidity coverage getting reduced. That is a bunch of steps, are you buying any NBFC paper?
    Iyer: Two parts to your question. We are buying NBFC paper but we are buying very selectively. We are not buying in mass and we have been buying ever since around the policy.
    What about housing finance companies?
    Iyer: We are buying housing finance companies and NBFCs both but largely in the up to three-month segment. We are not going beyond the three-month segment because we ourselves do not have clarity on how our liability will behave which is largely our investors.
    Second is how did the market react. The market initially started off on a positive note. In the morning, the bid offer spreads were about 5-10 basis points lower, but as we saw the equity markets gain momentum and gain steam and a lot of corrective stocks in red today, largely the NBFCs and HFCs, the market broadly ended flattish, maybe marginally about a 1-2 basis point higher. So muted reaction, less activity, started off on a fairly euphoric note today.
    Would you step up your purchases of NBFC commercial paper (CP), and more importantly housing finance commercial paper or would you wait for the first securitisation tranche?
    Iyer: We have been hearing a lot that a lot of HFCs are looking to securitise, etc. We need to get something more tangible to see to be able to meaningfully step up purchases from the current levels.
    So to answer your question, I do not think at this point in time we will step up purchases. It will be a little bit of a wait and watch mode to see how this sell down actually materialises for us to gain more confidence.
    How did you react to this sudden downgrade by Brickwork of one real estate company and the pell-mell it has caused both on Wednesday and on Friday in housing finance stocks? Has that raised the fear that we do not know who are the final borrowers of housing finance companies?
    Iyer: The surveillance level obviously has shot up manifold after this announcement of the news that we read. However, the good news is that if you scan through some of these lending's in detail, you realise that these are very excessively collateralised assets and lending's done at the SPV level. So, the reason for panic or fear to spread across is very limited to my mind.
    I do not have much data on the extent of developer loans that NBFCs are exposed to. There is some data which Credit Suisse has given us, they have done a bottom up aggregation of exposures from 25 largest firms, which account for 70 percent of the total loans in the system and they say that the NBFC exposure has risen by 55 percent from March 2016. If you took from year ago levels, the NBFC exposure to the real estate space has risen by 30 percent. Now if this money does not come are you going to see too many real estate companies get into trouble?
    Jasuja: The problem really started in the real sector about three years ago and they were very well bailed out by the likes of Piramal and Indiabulls Finance when they went out and funded developers against large land banks that were licenced, that they owned and the situation got resolved for the time being.
    At this point in time, if the NBFCs stop lending to the developers, that problem will probably restart again in a big way. The total loan in my mind to the developers who could be distressed, which do not have annuity income at all would be roughly around Rs 50,000 crore upwards. That is my sense of what the NBFCs would have lent in total to these developers.
    There was a lot of re-financing happening of these developers from one NBFC to the other and I think it should continue for a while otherwise you will see some more distress and some more Supertech's come out. We have known of Supertech being in financial problems for the last two years.
    Are you likely to see more companies find it difficult to pay up their interest?
    Jasuja: That is a high probability right now because sales of real estate has picked up but it has picked up in the ready side of the market, the under-construction side is still suffering quite a big deal. There is a high probability that in the coming few months you could have some more defaults like Supertech, especially in the north region.
    Banks have shown interest in securitised paper and SBI made a big announcement that it will treble but look at where the problem is, as Jasuja says, it is actually in the developer loans. When banks look at securitised paper will they want to look only at home loans and not developer loans, will they cherry pick?
    Padmanabhan: They could. At least in the case of my bank, since we are consciously moving into retail, one of the things that we are looking at as a priority is the home loans. I am not sure that the developer loans are going to take a complete drying up but it will be more cherry picked.
    You would think any bank will pick up the developer loans? There is a problem in terms of prompt corrective action banks where capital is scarce and therefore you are nudged to pick up safe loans which require less risk weight and for the private sector banks there is a liquidity issue. The loan deposit ratio is running between 95 and 105 according to some numbers.
    Padmanabhan: That is where this LCR and all is going to help. If you ask me, it is going to help more the private sector banks because the credit deposit ratio that they run is much higher than the public sector banks.
    Many of them have lost their CEOs, do you think they will be risk averse?
    Padmanabhan: I do not think so. The business cannot stop because the CEO is getting changed. There will be a re-orientation but my gut feeling is that the developer loan is it going to completely dry up? I do not think so but it will be much more selective and cherry picked.
    If you can give us a little more graphic explanation or detailing of the kind of money needed? Is there a number to the amount of incomplete projects, any number to the exposure of these incomplete projects to NBFCs and therefore how much trouble we should expect?
    Jasuja: There are two parts to this, we had come out with a report earlier where we had said that $50 billion of real estate is probably not going to get constructed very soon. There are projects that have been delayed for a very long time and those projects have been funded also by some of the NBFCs and some of the banks as well, if you keep that out, fresh real estate development that is under-construction would be another about $75 billion which is in progress at various stages in the top 15 cities.
    A large part of it is coming through the retail housing finance loans but at least 20-25 percent of that would be coming to the developer through the NBFC developer loan segment which could coming through the banks or from the housing finance companies.
    $75 billion would be something like Rs 5 lakh crore number you are looking at.
    Jasuja: That is the overall construction in progress in the residential sector as we speak right now in the top 15 cities.
    And 25 percent of that was coming from NBFCs?
    Jasuja: Yes in form of developer loans.
    With this kind of a picture and reasonable amount of granularity that you are getting, how many of the debt funds will be willing to re-finance housing finance companies?
    Iyer: In housing finance companies 75-80 percent is mortgaging including some self-employed LAPs and maybe 20-25 percent is developer financing book. I do not deny that there is a little bit of caution which is right now impending in that particular segment but if you look at the 75 percent of the book, it is a fairly decent book.
    Having said that I would reiterate that there is a reason to be selective about the NBFC or HFCs that you will lend to, it will not be en masse lending which used to be a case till a while back. That is where mutual funds will exercise caution including people like us who would want to wait and watch it out irrespective of what one were to guide due to an outcome. So, I think it would be a very selective game that we need to do.
    That is what is the crux of the problem, the RBI has perhaps bought time by showing its indication and willingness to give liquidity. However, this is not the final solution. As Samir Jasuja points out, there is a genuine problem of money that will not be available because the NBFCs do not have the money and banks will be wary of lending to them since they are already coming out of a fairly deep NPA cycle. In the past, for instance in the US and even in other counties, when did the threat about banks having a big hole go away. When the Fed did a stress test in May 2009 and said that of these 19 banks so many of them are kosher, I think 11 are kosher and the other require this much amount of capital. Do you think something as drastic as an AQR needs to be done by the RBI on systemically important HFCS and NBFCs?
    Padmanabhan: I think the overall supervision over the NBFCs and HFCs, whether we like it or not, definitely will go up as a result of all these problems that they are facing.
    In particular, the NHB has not had a chairman and if RBI has to extend a helping hand to HFCs, why would it do it if it did not have supervisory control? I am going drastic over here, I am asking you if housing finance regulation, NHB may have a developmental role, but housing finance regulation should come to the RBI and they need to do an AQR, is that the way forward?
    Padmanabhan: It has to be; as long as the supervisory powers are with a single regulator, to the extent possible, it becomes possible to see across the system because there are interlinkages rather than seeing this system in the segment and ultimately you miss the elephant; that generally happens.
    However, having said that, I think clearly one thing of course which I do not entirely go along with what you are saying, is I think the way in which an institution has to function and has to go forward, need not entirely depend upon whether the chairman is there or not. I think this is an issue, I think there are several experts who are already there and this has to be taken forward.
    So I think what got missed was when this change happened, as I said earlier, the move away to the capital markets, the kind of issues that it could bring about once the sentiment changes, I think in retrospect all of us missed and that something which I think has to get corrected whether it is through a stricter ALM or any other means. Again that is something which needs to be put in place after a considerable amount of discussion because the kind of issues the NBFCs faces are different from what the banks face. So it is just not borrowing the bank model on to the NBFCs.
    Having said that, it is also important to make sure that today when there is an issue, the issue does not get bigger than what it is. So while AQR may be necessary, then you can talk about it to several other entities also.
    So when this AQR has to be done is something that we need to decide. However, somewhere there must be better information to the regulators, whether it is a single regulator or multiple regulator, has to what exactly are the kind of risks that are being run and it has become critical in today’s world because it is an interconnected world.
    With inputs fro Reuters.
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