Non-banking finance companies: India
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Court judgements
State laws cannot apply to NBFCs registered with RBI
Dhananjay Mahapatra, May 12, 2022: The Times of India
New Delhi: In an important judgment, the Supreme Court on Wednesday ruled that state laws cannot apply to over 9,500 non-banking financial companies (NBFCs) registered with the Reserve Bank of India (RBI).
Sawing off attempts by Kerala and Gujarat governments to bring NBFCs under the purview of their legislations regulating money-lending business, a bench of Justices Hemant Gupta and V Ramasubramanian said, “We are of the considered opinion that the Kerala Act and the Gujarat Act will have no application to NBFCs registered under the RBI Act and regulated by the RBI. ”
Writing the judgment, Justice Ramasubramanian said no NBFC can carry out business without being registered under the RBI Act. “An NBFC which takes birth with the registration under the Act is liable to be wound up at the instance of the RBI. The entire life of an NBFC from the womb to the tomb is also regulated and monitored by RBI under the RBI (Amendment) Act, 1997. ”
“Once it is found that Chapter IIIB of the RBI Act provides a supervisory role for the RBI to over- see the functioning of NBFCs, from the time of their birth till the time of their commercial death, all activities of NBFCs automatically come under the scanner of RBI. As a consequence, the single aspect of taking care of the interest of the borrowers which is sought to be achieved by the state enactments gets subsumed in the provisions of Chapter IIIB,” the bench ruled.
Credit to NBFCs
2017, 18+ the 2019 policy
RBI eases bank loan norms for NBFCs with top rating, February 8, 2019: The Times of India
From: RBI eases bank loan norms for NBFCs with top rating, February 8, 2019: The Times of India
In Maiden Policy, RBI Guv Das Gives Cash Boost To Agri, Non-Banking Fin Biz
Links Exposure To Ratings Issued By Accredited Agencies
Better rated nonbanking finance companies (NBFCs) have improved chances of getting loans with the RBI relaxing capital requirements for banks that lend to them. “With a view to facilitating flow of credit to well-rated NBFCs, it has now been decided that rated exposure of banks to all NBFCs, excluding core investment companies, would be risk-weighted as per the ratings assigned by the accredited agencies, in a manner similar to corporates,” the RBI said in its statement. Loans to a core-investment company, which acts as a holding company for other businesses, would continue to attract a 100% risk weightage.
Current guidelines require that bank exposure to systemically important NBFCs (other than asset and infrastructure financiers) have to be uniformly risk-weighted at 100%. What this means is that 100% of the loan is deemed to be exposed to risk and banks have to provide capital for the whole loan. As against this, the risk weightage is around 50% for most home loans.
“The amount of borrowing from banking system, which, as per the new announcement would get rating benefit is Rs 2.52 lakh crore. The change of risk weights, as per rating distribution would lead to capital saving equivalent to 7.58% of the assets under consideration, thereby releasing an amount of Rs 19000 Cr of capital,” said Soumya Kanti Ghosh, chief economist, SBI.
According to RBI deputy governor N S Vishwanathan, “This was an aberration in the risk-weight system. So,
this was a harmonisation and aimed at reducing complexity in regulations.” Besides this, the RBI also announced harmonisation of NBFC categories. Henceforth, all NBFCs engaged in credit intermediation — asset finance companies (AFCs), loan companies, and investment companies — have been grouped into a single category to provide them flexibility in operations.
The relaxation by the central bank comes at a time when NBFCs are facing tight liquidity conditions. After IL&FS — an infrastructure financier promoted by top rated companies — defaulted on its loans, lenders have turned wary. Even as there was some confidence building up in the markets, DHFL’s stocks and bonds came under pressure following rumours and allegations by a news site.
Data released by the RBI shows that bank credit to NBFCs stood at Rs 5,70,900 crore — nearly 7% of overall bank credit of Rs 82.4 lakh crore as on December 21, 2018. This is an increase of 55% over Rs 3.6 lakh core in the previous year.
Making it easier for better-rated NBFCs to borrow could encourage consolidation as less creditworthy companies might sell their loans to those with better finances.
Financial crises
2015-21
From: August 4, 2021: The Times of India
See graphic:
NNPA ratio and GNPA ratio, March 2020- March 2021
2018: Liquidity squeeze hurts NBFCs
Prashanth Perumal J., October 25, 2018: The Hindu
With concern over repayment of dues, shadow banks are caught in a vicious cycle
What’s up with NBFCs?
Shares of non-banking financial companies (NBFCs) have witnessed a steep fall in recent weeks after concerns over whether they can successfully meet their short-term dues. Housing finance companies (HFCs) in particular have seen their shares punished severely over fears of a severe liquidity crisis. Dewan Housing Finance has been the worst hit among HFCs. The current crisis began with the default of Infrastructure Leasing and Financial Services on several of its dues last month. The Union government subsequently decided to step in and assure lenders to the company that their money would be paid back safely without any default.
How did they get into trouble?
Many NBFCs use short-term loans borrowed from the money market to extend long-term loans to their customers. This leads to a mismatch in the duration of their assets and liabilities and exposes NBFCs to the substantial risk of being unable to pay back their lenders on time. NBFCs usually resort to rolling over, or refinancing, their old short-term debt with new short-term debt to compensate for the mismatch in duration. But even though NBFCs usually manage to roll over their short-term debt smoothly, there are times when they may fail to do so. Such risk is high particularly during times of crisis when lenders are affected by fear. In such cases, they may have to resort to sale of their assets at distress prices to meet their dues. This can turn a liquidity crisis into a more serious solvency crisis, wherein the total value of the assets of a company falls below the value of its total liabilities. Further, NBFCs also face the risk of having to pay higher interest rates each time they refinance their short-term debt. As interest rates rise across the globe, equity investors believe that the cost of borrowing of NBFCs will rise and affect their profit margins. This is seen as the primary reason behind the fall in the shares of many NBFCs. Investors may be pricing in the prospect of falling profits for NBFCs in the coming quarters.
What lies ahead?
It is estimated that NBFCs need to repay about Rs. 1.2 trillion of short-term debt in the current quarter. How they manage to meet these dues remains to be seen. It is hoped that banks will offer a helping hand to NBFCs to meet their short-term dues to lenders like mutual funds. Many further believe that a widespread financial panic may not be on the cards as the government will act as a lender of last resort. Such bailouts, however, create the risk of moral hazard in the wider financial system. NBFCs, for instance, may continue to borrow short-term to extend long-term loans to their customers because they expect the government to bail them out if they get into trouble. In fact, some believe that financial institutions in general have traditionally resorted to borrowing short-term to finance long-term loans simply because there is an implicit guarantee extended by the government. As the cost of borrowing funds rises, NBFCs may have to settle for lower profits unless they find a way to pass the burden of higher rates on to borrowers.
2019: ‘loans to real estate down 48%
July 26, 2019: The Times of India
‘NBFC lending to real estate players down 48% in FY19’
AT ₹27K CR
New Delhi:
Lending to real estate developers by non-banking finance companies (NBFCs) and housing finance firms (HFCs) fell by almost half to about Rs 27,000 crore because of the liquidity crisis triggered by the IL&FS default in September 2018, according to a report by property consultant JLL.
With large NBFCs and HFCs shying away from fresh lending to real estate developers, smaller ones have come to the rescue of builders and provided a Rs 4,000-crore fund during the second half of the last financial year, it added.
“Default by leading NBFC IL&FS in scheduled payments led to a liquidity squeeze in the real estate sector since September 2018,” JLL India country head & CEO Ramesh Nair said.
NBFC and HFC funding was normal during April-September 2018, but due to the crisis, the lending slowed down substantially during the second half of 2018-19, considered to be the peak period for lending activities. “In 2018-19, net disbursals by NBFCs/HFCs to real estate developers declined by almost half from about Rs 52,000 crore in 2017-18 to an estimated Rs 27,000 crore in the next fiscal,” Nair said. AGENCIES
Financial status of NBFCs
2018, 2019
Mayur Shetty, July 25, 2019: The Times of India
From: Mayur Shetty, July 25, 2019: The Times of India
According to the RBI, the top 10 NBFCs accounted for more than 50% of total bank exposure to the sector. Bank borrowings, debentures and commercial papers are the major sources of funding for NBFCs. Bank borrowings have shown an increasing trend as its share to total borrowings have increased from 21.2% in March 2017 to 23.6% in March 2018 and further to 29.2% in March 2019. The share of bonds has dropped from 50.2% in March 2017 to 41.5% in March 2019. After the IL&FS crisis, banks’ exposure to NBFCs increased even as commercial paper as a source of funds dried up.
Non-institutional credit agencies
Cash loans advanced
2012>2018
Sep 16, 2021: The Times of India
The stranglehold of the money lender in rural areas across the country may be easing. A recent survey has shown that the share of cash debt from non-institutional credit agencies has declined sharply to 34% in 2018 from 44% in 2012 and nearly all states have shown this trend, indicating the increase in formalisation of the economy.
An analysis of the All India Debt & Investment Survey (AIDIS) by SBI research showed that the share of non-institutional credit has declined significantly in Bihar, West Bengal, Rajasthan, Haryana and Gujarat.
It said even in Haryana and Rajasthan that witnessed loan waiver schemes, the share of non-institutional credit declined contrary to popular perception. “This could be explained by significant increase in penetration of Kisan Credit cards (KCC) in these two states. Our estimates show the number of KCC cards has jumped five times over the seven-year period ended 2020. For the record, Haryana and Rajasthan did witness an average increase of 9%,” Soumya Kanti Ghosh , group chief economic adviser at SBI said in his report.
He said the recent reforms in agriculture could further help in formalisation of the economy. “However, there is still a fundamental reform pending that is in the realm of RBI. This is making agriculture cash-credit at par with other segments,” he said. The report said as per the norms of asset classification for agriculture advances, in case of an agriculture cash credit account a farmer has to repay the entire outstanding (principal along with interest) to seek fresh loans from the banks unlike other segments of cash credit business where if the borrower has cleared interest payments, he/she would be eligible for enhancement/ renewal. It would be in the interest of the farmer, if the farmer is given renewal/enhancement, especially when the bank is satisfied with the farmer in terms of his/her land holding/paying capacity etc, the report added.
Ownership
As in 2019
November 24, 2020: The Times of India
From: November 24, 2020: The Times of India
Half of NBFCs which qualify for bank licence are corporate-owned
Around half of the finance companies with assets of over Rs 50,000 crore that meet the RBI’s size criteria to get a bank licence are part of corporate groups, while two are already part of banking groups. Not many standalone nonbanking financial companies (NBFCs) are likely to qualify for the bank licence norms.
The RBI’s internal working group in its report had said that well-run NBFCs, with an asset size of above Rs 50,000 crore, including those which are owned by a corporate house, may be considered for conversion into banks.
Among the top 10 finance companies in terms of assets under management, Aditya Birla Capital, Bajaj Finance, L&T Finance Holdings, Mahindra Finance, Piramal, and Tata Capital are part of a corporate group. Of the remaining NBFCs, HDFC is already a promoter of a bank, while the Life Insurance Corporation, promoter of LIC Housing Finance, owns IDBI Bank. PNB Housing Finance, another large NBFC, is owned by Punjab National Bank. The RBI has said that companies have to wait till laws are changed to give the central bank powers to supervise corporate groups before giving them a bank licence.
However, it has left the door open for NBFCs that are owned by corporates if they have been around for 10 years.
The other standalone NBFCs that have a balance sheet size of over Rs 50,000 crore are Shriram Group finance companies, Indiabulls Housing, Cholamandalam Finance, Muthoot Finance, and Edelweiss Finance. IIFL and Sundaram Finance, although large established lenders, are likely to fall short of the target.
For Shriram Transport Finance, transferring its vehicle finance business into a bank would reduce efficiency. “A bank has to provide a very wide range of services, maintain SLR (statutory liquidity ratio) & CRR (cash reserve ratio) requirements and operates at a much higher cost structure compared to NBFCs. So, an NBFC will have to weigh the pros and cons after the final guidelines, and understand the impact for stakeholders (shareholders, employees, customers) before considering conversion into a bank,” said Shriram Transport Finance MD & CEO Umesh Revankar.
Another disincentive for Shriram is that the RBI has said that, upon conversion into a bank, any lending activity that can be undertaken within a bank has to be transferred to the bank. However, many lenders have NBFC arms. Indiabulls had made unsuccessful attempts to acquire a bank licence earlier. The last time was when it proposed to merge with Lakshmi Vilas Bank, which was rejected by the RBI. The group is likely to try again.
A big challenge for the NBFCs to convert into banks will be the cost of investment in technology and setting up a retail branch network. They will also have to face additional costs in complying with the SLR of 18% and the CRR of 4% and not all NBFCs can meet this cost of compliance.
Policies, trends
2019: housing, infra finance companies avoided
July 3, 2019: The Times of India
NBFCs delink themselves from hsg & infra fin cos
‘NOT STRESSED’
TIMES NEWS NETWORK
Mumbai:
Non-banking finance companies (NBFCs) have sought to distance themselves from housing finance companies (HFCs), which are facing stress, and infra lenders like the troubled IL&FS group. An industry body has said that the sector is neither overleveraged or stressed and nor does it have an asset-liability mismatch. The industry association has sought recognition for NBFCs as partners of banks, helping them lend to the priority sector.
Representatives of the NBFC sector from various finance groups — including Mahindra & Mahindra Finance, SREI, Shriram Transport Finance, Sundaram Finance and Muthoot Group — in a joint press conference under the aegis of Finance Industry Development Council (FIDC) said that the solvency issues
faced by some institutions were being hyped as a liquidity issue. FIDC chairman and SREI Equipment Finance senior vicepresident Raman Aggarwal said the defaults at IL&FS and DHFL were being made out to be representative of the NBFC sector, while NBFCs were distinct from HFCs, which were long-term financiers. IL&FS was a unique case as there are only eight infrafinancing NBFCs, of which five are government-owned.
“The bulk of NBFCs are short-term, small-ticket loan providers with average maturity of loans between two and five years. Nine months have passed since IL&FS defaulted without any NBFC defaulting. NBFCs have met their liabilities by restricting their lending. The current crisis is a growth-related issue and not a solvency issue.”
Govt/ RBI’s guidelines
NBFCs can’t charge prepayment fine
August 3, 2019: The Times of India
NBFCs can’t charge prepayment fine: RBI
Mumbai:
The RBI barred non-banking finance companies (NBFCs) from charging prepayment penalties or foreclosure charges from individual borrowers.
“NBFCs shall not charge foreclosure charges/pre-payment penalties on any floating rate term loans sanctioned for purposes other than business to individual borrowers,” the central bank said in a notification, without specifying from when the new rules will be effective.
The central bank said the relevant rules governing the same have been updated to reflect the change.
Foreclosure charges are part of the fee income for any lender and adds to its bottom line. These direction covers both deposit-taking as well as non-deposit-taking NBFCs. AGENCIES
NBFCs must keep 1-month cash needs in liquid assets
May 5, 2019: The Times of India
NBFCs must keep 1-month cash needs in liquid assets
TIMES NEWS NETWORK
Mumbai:
Non-banking finance companies (NBFCs) will now have to maintain liquid reserves to ensure that they have a buffer for any unexpected requirements.
The new rules are a fallout of the crisis in the sector following defaults by large firms like IL&FS Financial Services. The liquidity norms announced by the RBI on Monday, will apply to most NBFCs like the ones lending to real estate developers and retail consumers for housing, vehicle and microfinance loans. The only NBFCs exempt from this will be pure-play investment companies and government bond dealers.
The liquid reserves have to be in high-quality assets like government bonds, debt securities or actual cash that is adequate to fund 30 days of operations. The presence of liquid reserves will prevent an NBFC from going into a default spiral if some inflows get delayed. There have been instances of NBFCs being downgraded and having their loans recalled after they failed to meet an instalment to a lender.
While earlier NBFCs were not required to maintain liquidity ratios, now the RBI has asked them to monitor cash outflows for a seven-day period. Based on that, NBFCs are supposed to arrive at how much cash they would need for a 30-day period using liquidity monitoring tools used by banks. By December 1, 2020, NBFCs with loan portfolioof Rs 10,000 and above will have to maintain a liquidity coverage ratio (LCR) of 50%, and NBFCs with asset size of Rs 5,000-10,000 crore will have to maintain a LCR of 30%.
The international position
2013> 2018
From: November 25, 2020: The Times of India
See graphic:
Non-bank financial intermediation in India, Brazil, Canada, China, Italy, South Korea: 2013> 2018
Loan and advances
2014-17
From: October 10, 2018: The Times of India
See graphic:
Non-Banking Finance Co's loans and advances, 2014-17
2018-19
Mayur Shetty, July 27, 2019: The Times of India
From: Mayur Shetty, July 27, 2019: The Times of India
A report by property consultant JLL said that in 2018-19, net disbursals by NBFCs/HFCs to real estate developers declined by almost half from about Rs 52,000 crore in 2017-18 to an estimated Rs 27,000 crore.
Despite facing a credit crunch, some NBFCs were seeking to raise funds to on-lend to real estate projects, which were stuck for want of additional funding. These projects will now have to look for other lenders as the RBI does not want this risk to be passed onto banks’ balance sheets. The fear is that the troubled projects could multiply the problem for the financial sector as banks and HFCs are already exposed to them through under-construction home loans.
Last year, with capital markets drying up for real estate companies, many of them turned to bank finance, and when banks reduced their exposure, they increased their dependence on finance companies. A large chunk of the funding to NBFCs came from banks (see graphic).
According to RBI data, bank lending to NBFCs stood at Rs 6.23 lakh crore as on May 24, 2019 — an increase of 40% over the Rs 4.43 lakh crore outstanding on May 25, 2018. This does not take into account the accommodation provided through bonds and money market instruments.
Meanwhile, industry association Ficci said in a report that nearly 80% of the institutional investment in real estate is accounted for by private equity (PE) investors. The report said that the drying up of funds led the PE players and NBFCs to step in to provide finance to the real estate industry.
2020-22
From: June 17, 2023: The Times of India
See graphic:
The Market share of NBFCs vis-à-vis banks, 2020-22
See also
Non-banking finance companies: India
