NBFCs expand working capital loan business as banks retreat5 min read . Updated: 10 May 2016, 02:02 AM IST
Risk-averse banks are declining to offer such loans due to the lack of adequate capital and a rise in bad loans
A handful of non-banking financial companies are stepping in to meet working capital demand from companies at a time when banks, under siege from huge bad loans, are becoming picky in lending to corporates.
Demand for such cash-flow backed loans, which are given out for relatively shorter tenors and carry lower risk when compared to term loans, has been traditionally met by banks.
Recently, though, lenders have started to decline requests for additional working capital limits because of internal constraints such as lack of adequate capital and a rise in bad loans.
To fill this gap, financiers such as Religare Finvest Ltd, Edelweiss group arm ECL Finance Ltd, IndoStar Capital Finance Pvt. Ltd and IREP Credit Capital have stepped in. Companies approaching NBFCs are those who are typically looking for working capital loans of ₹ 100 crore to ₹ 300 crore.
“What NBFCs have been doing is complementing what the banking system does by offering to do what banks cannot do. But now, what is happening is that NBFCs are also doing what banks generally do," said Nachiket Naik, managing director of IREP Credit Capital.
Naik added that this trend has picked up over the past three quarters as banks have turned risk-averse.
Traditionally, NBFCs have focused on a specific sector or size of companies in catering to credit needs of corporates. For instance, SREI Infrastructure is a dedicated financier of infrastructure projects, others such as Shriram Transport Finance focus on the transportation segment, while Religare Finvest chose to focus on SME-focused lending.
But the additional working capital demand that these NBFCs are now catering to is not restricted to a specific sector, executives said.
Indeed, the growth in the loan portfolio of NBFCs suggests that these financing firms are picking up some of the business that banks are not in a position to take.
According to the Reserve Bank of India’s financial stability review released in December, loans and advances of NBFCs grew at 14.2% as of September 2015 from a year ago. This growth was higher than the 8.9% growth in bank credit over this period. More recent data is not available since credit growth for the NBFC sector is reported with a lag.
Anecdotal evidence also points to an increase in the loan demand being directed towards NBFCs.
For instance, SME-focused Religare Finvest’s loan book grew 28% from a year ago during the quarter ended December. Its loan book has been growing over 25% for three consecutive quarters. This growth is coming from secured loans to SMEs, the company had said in its earnings release.
Kavi Arora, managing director of the company said that as bank loan disbursal growth has slowed, that of the NBFCs has grown. “We are not only seeing new borrowers coming to us for working capital but also increased demand from existing customers," he said, adding that the company had seen its highest disbursals in eight years in fiscal 2016.
Arora believes that the gradual shift of credit demand from banks to NBFCs is not just a short-term phenomenon. “This is a long-term shift from bank funding to NBFC sector; it is not just a quarterly trend," he said.
Bankers acknowledged that some of the business is getting diverted to NBFCs for a variety of reasons.
“As bankers, we are definitely more cautious than before and companies will obviously have to approach other avenues for funding," said an executive at a large public sector bank, requesting anonymity.
Laden with bad loans that swelled after the RBI conducted an asset quality review in December, public sector banks are reluctant to even extend working capital loans to debt-heavy companies. Besides the risk aversion that has set in, some lenders are turning away companies owing to constraints on capital as well.
“Yes, we are becoming risk-averse now not just to existing stressed borrowers but also to new borrowers because we don’t know whether the funds are for genuine business purposes or for repaying someone else’s loans," said a senior official at Bank of Baroda requesting anonymity as he is not authorized to speak to the media.
For the December quarter, 24 public sector banks reported an aggregate loss of ₹ 10,911 crore compared to a profit of ₹ 6,970.8 crore in the year-ago quarter. Such was the surge in bad loans that provisions wiped out the profits of 12 out of the 39 listed banks. Out of the 27 banks that reported a quarterly profit, six saw profit plummet more than 70% from the year-ago period. This performance could be repeated in the quarter ended March as well. Most public sector banks are yet to report earnings for the March quarter.
With resolution of existing assets a priority, lending to newer businesses has slowed.
To be sure, NBFCs are not lending to companies that have been rejected by banks on the basis of their poor credit. “It is just that banks are not able to meet some demands because of their own challenges. It is in no way compromising credit standards," said Naik.
Typically, the rating profile of companies that approach NBFCs for working capital has been between ‘A’ and ‘BBB’. Small and mid-sized companies have been the major borrowers.
The cost of borrowing from NBFCs is higher than the cost of bank funding. NBFCs charge between 200-250 basis points more than banks on a working capital loan, said Naik.
“In the last two years, this shift has been happening, and the trend is getting stronger over time," said Saswata Guha, director for financial institutions at Fitch Ratings, explaining that part of this is because of the inability of banks to lend as aggressively as they have in the past.
“The story has never been for NBFCs that they have poached or taken away market share from banks. Their story has been in catering to segments where banks were hesitant or less comfortable to lend in the first place," said Guha. “Different players are using different strategies, but I don’t think NBFCs are going all-out and necessarily lending to corporate lenders which banks are avoiding."