Companies

Srei explores merger with bank if RBI policy permits

Shobha Roy Kolkata | Updated on July 27, 2020 Published on July 27, 2020

Hemant Kanoria, Chairman, Srei

Merger will combine reach of Srei with the bank’s low-cost funds; provide solution to NBFCs’ liquidity crisis

Srei, which has more than ₹45,000 crore of consolidated assets under management, may explore the possibility of a merger with a bank if the Reserve Bank of India’s (RBI) policy permits. The merger will combine the reach and distribution capabilities of Srei with the bank’s low-cost funds. This will provide a long-term solution to the current liquidity conundrum for NBFCs and will help in expanding the reach of banking services to larger number of micro, small and medium enterprises (MSMEs).

According to Hemant Kanoria, Chairman, Srei, the RBI, in consultation with the government, should consider introducing a policy framework to facilitate mergers between NBFCs and banks.

While the measures announced by the government and the RBI to address the liquidity crunch in the NBFC sector are expected to have medium to long-term benefits, the steps are not providing any relief in the short-term.

“Several steps have been announced so far but they are not having the desired effect. A merger between banks and systemically important and large NBFCs could offer a solution. But for that to happen, there has to be a policy decision by the RBI in consultation with the government,” Kanoria told Business Line.

When asked if Srei was willing to merge its NBFC business into a bank, he said, “Definitely, why not? If it helps in addressing the structural issue of raising resources on an ongoing basis then why not?”

Srei has recently consolidated its entire lending business into Srei Equipment Finance Limited and is structurally prepared for a possible merger with a bank. The company plans to grow its equipment finance business and has decided to reduce its infrastructure project financing portfolio gradually in an effort to de-risk its balance sheet.

Srei Infrastructure Finance Ltd, the parent of Srei Equipment Finance, now focusses only on fee-based businesses through infrastructure advisory, structuring and syndication solutions, investment banking advisory, insurance broking and fund management.

“The move to consolidate the lending operations into one entity would help Srei Equipment Finance attract strategic investors and also prepare the company for conversion into a bank, as and when RBI decides to allow systemically important NBFCs to convert into banks,” industry analysts had said while explaining the rationale behind the move.

It may be noted that the RBI had permitted the merger of NBFC Capital First and IDFC Bank in 2018. Talks are currently on for a possible merger between Clix Capital and Lakshmi Vilas Bank.

Solving liquidity issues

According to Kanoria, the government and the RBI need to come out with a practical plan to address the liquidity issue in the NBFC sector. While money is the raw material for NBFCs, they have to largely depend on banks, with whom they compete. With banks becoming cautious lenders and shying away from providing credit support to the NBFC sector, the industry is now facing a liquidity issue.

“The government and the RBI must take steps to ensure sufficient liquidity is available on an ongoing basis. Offering temporary liquidity is not an ideal solution,” Kanoria said.

Apart from allowing mergers between NBFCs and banks, and/or allowing larger and systemically important NBFCs to convert into banks, the government may also consider creation of an institution which would continuously offer funding support to NBFCs, much like the National Housing Bank (NHB) which supports the housing finance companies.

“ A decision needs to be taken keeping in mind the medium to long-term objective of ensuring steady liquidity support to the sector. Post the IL&FS episode, there have been several short-term measures but they have not achieved their desired goals. The problem still persists and the situation has not improved in the last two years because the core issue has still not been addressed. Hence, the entire financial services sector, including the NBFCs, are currently feeling the heat,” Kanoria added.

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Published on July 27, 2020
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