With the economic outlook turning gloomier under the current nation-wide lockdown necessitated by the coronavirus outbreak, the business environment will be depressed for the next 2-3 quarters, says Ravi Subramanian, MD and CEO, Shriram Housing Finance.

He expects this to lead to some enhancement in non-performing assets (NPAs) for lenders. Hence, non-banking finance companies (NBFCs) and housing finance companies (HFCs) will be more focussed on managing risks efficiently than chasing growth. In an interaction with BusinessLine, Subramanian hoped that the regulator and lending institutions will take up specific requests of NBFCs and HFCs for extension of moratorium on their debt, on a case-to-case basis. Excerpts:

Since NBFCs and HFCs have to offer moratorium to their customers but aren’t themselves getting it on their borrowings from banks, how do they overcome the liquidity pressure due to this?

This is a challenging phase for all HFCs/NBFCs. While there will be an inherent cash flow mismatch due to the current moratorium, in some cases, it will also lead to ALM (asset liability management) mismatches across tenors, especially in the lower-tenor baskets. NBFCs/HFCs with better-managed balance sheets will be able to sail through this turbulence. However, some smaller or stressed financial institutions (FIs) may face temporary or permanent damage, depending on the extent of the mismatch.

We hope that the regulator and lending institutions take up specific requests of moratorium extension to NBFCs and HFCs on a case-to-case basis. That said, efficiently managed NBFCs and HFCs will be able to honour their obligations due to better liquidity management. We, at Shriram Housing, are in a fairly comfortable liquidity situation and will meet our obligations.

The RBI is conducting targeted long-term repo operations (TLTROs) for banks so that they can buy debt papers issued by NBFCs. Will this indirect mechanism of providing liquidity really help?

In the present situation, it may be of limited help. Banks have been extending credit facilities to select NBFCs and HFCs over the past few months. Again, their selection is on the basis of the prudent risk management approach of these specific companies. Given a choice, banks will continue to back NBFCs where they already have existing long-term relationships and have significant confidence that the management teams will be able to tide over the current situation. At present, banks are extending this facility only to AAA rated FIs.

However, this operation may not help NBFCs that have been denied a credit line. Further, given a choice, a bank will be more comfortable extending the moratorium to such NBFCs than investing in their debt papers. Some NBFCs may be susceptible to rating changes in such an uncertain environment. I am unsure if banks will be willing to take such additional risk on their balance sheet.

Should the RBI open a liquidity window exclusively for NBFCs to overcome the liquidity crunch?

Yes. That should be the preferred mechanism than the current LTRO mechanism. It should be more need-based and should be able to help out smaller NBFCs.

What is your outlook for the housing finance sector in FY21?

The economic outlook has turned gloomy under the current lockdown. There is anticipation of a depressed business environment for the next 2-3 quarters, which will translate into insignificant business and income growth for salaried as well as self-employed segments. Further, small businesses will have to navigate through their liquidity challenges

We anticipate that this will lead to some enhancement in delinquencies and NPAs. Also, NBFCs and HFCs will be more focussed on managing risks efficiently than chasing growth. However, as consumer confidence normalises over the next few quarters, so will the business cycle. The housing finance business has been through cycles in the past and hopefully should be able to get back to normalcy within FY21.

What percentage of your borrowers have opted or are likely to opt for the three-month regulatory moratorium on loan repayment? Is the three-month moratorium enough?

We have offered this facility to most of our customers (excluding NPA customers). A large part of the self-employed segment has availed themselves of the facility. The extent of the moratorium is dependent on the lockdown. If we are to return back to normalcy over the next 15 days, then it’s a reasonable period. However, the regulator should re-look at the moratorium period if there is any likelihood of extension of this lockdown.

Should the RBI give lenders regulatory forbearance vis-à-vis IRAC (income recognition and asset classification) norms? What should the government and the RBI do to help the NBFC sector and its customers overcome the current crisis?

The RBI should provide some relief to NBFCs by relaxing IRAC norms (for eg, moving NPA recognition to 180 days from 90 days), thereby, providing regulatory forbearance, as the current situation will create serious ALM mismatches for a good number of NBFCs. The same, if coupled with higher NPAs generated due to the lockdown situation, will prove to be a double whammy for them.

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