Temporary prop

SBI must let commercial considerations alone dictate its dealings with NBFCs

The co-ordinated action by the Reserve Bank of India (RBI), National Housing Bank (NHB) and SBI to open the liquidity tap to domestic lenders, even if it comes quite late in the day, is a good move to shore up shaky market confidence in the NBFC sector. While the RBI’s move to conduct open market operations of ₹36,000 crore this month may mainly help banks, NHB’s decision to raise its refinancing limits to ₹30,000 crore (from ₹24,000 crore) may serve as a limited lifeline to housing finance NBFCs, which are expected to face the highest negative gaps in their operating cash flows in the next six months. SBI’s plan to double its planned purchases of securitised loan portfolios this fiscal to ₹30,000 crore can free up much-needed cash, for the NBFCs which manage to wrangle these deals. Overall, these measures may help NBFCs to paper over their immediate liquidity crisis and perhaps moderate the market’s risk perception of them.

While the role of the RBI and NHB in throwing a lifeline to NBFCs is understandable, given that they are regulators responsible for systemic stability, SBI’s decision to be co-opted into this rescue package is curious. It no doubt makes business sense for universal banks, without niche lending skills, to acquire ready-made portfolios of micro-finance loans, crop loans or commercial vehicle loans from NBFCs specialised in last-mile lending, to meet their own priority sector targets or even bump up their yields. But then, this decision needs to be made strictly on commercial lines, with the bank driving a hard bargain on the acquisition price and building in significant buffers for defaults. In the current market context, a bank would be prudent to relieve NBFCs only of their high-quality assets, while staying off deals involving unsecured loan, personal loan or loan against property (LAP) portfolios, where credit risks are believed to lurk. One hopes that SBI will be making its decisions on these lines, without caving in to any extraneous pressures to expedite its due diligence or bail-out specific NBFCs. Any such bailout would carry a strong moral hazard. After all, NBFCs should have been well aware of the risks of relying on the whimsical commercial paper market to finance their breakneck growth.

However, while throwing NBFCs a liquidity lifeline may stave off the immediate problem, the fundamental problem of Indian NBFCs (and other financial institutions) facing a dearth of longer-term financing avenues for their long-gestation exposures remains unaddressed. Commercial banks, both in the public and private sectors, have proved to be sorely lacking in both project and credit appraisal skills. Of late, NBFCs have taken to directly tapping retail investors with public issues of long-dated bonds. But after the IL&FS fiasco, one wonders if retail investors would again be let down by the rating agencies, on whom they overwhelmingly rely for assessments of these bonds. A clean-up of the credit ratings ecosystem is imperative for SEBI, before this trend takes wing.

Published on October 11, 2018

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