Banks cherry-pick NBFCs for loan disbursal

While the Centre is pushing banks to disburse more loans to non-banking financial companies (NBFCs), banks have started lending more only to those that are backed by the government in an effort to shore up their overall disbursements.

Finance minister Nirmala Sitharaman held a meeting with bank chiefs in mid-December, wherein she urged them to disburse more loans to the NBFC sector, one of the two people cited earlier said on condition of anonymity.

“While we understand the government’s point of view, we will also have to protect our interests as banks while giving more loans to NBFCs. Therefore, we have started sanctioning and disbursing more loans to state-owned NBFCs at a thin margin to increase the overall loans to the sector," the person said, adding that at least by lending to such NBFCs, the banks are assured that their loan book is unlikely to deteriorate.

Banks are also not averse to lending to top non-banks, the person said. Data from the Reserve Bank of India (RBI) showed that net disbursements to non-banks stood at ₹7.3 trillion as on 22 November, a 14% jump from the beginning of this fiscal.

The clear difference between the good, the bad and the ugly among India’s shadow lenders has come to the fore in the past one year as the effects of IL&FS’s defaults seeped deeper into the financial system.

RBI governor Shaktikanta Das said in December that credit flow was slowly reviving to the NBFC sector and the better-performing ones are able to access funds from the market at pre-IL&FS rates. The market today, Das had said, was differentiating between the good and the not-so-good NBFCs.

Lenders have also started renewing credit lines only on a case-to-case basis, in a bid to dissuade borrowers from tapping bank loans. Bank of Baroda (BoB), for instance, has decided against renewing some existing credit lines to NBFCs and is instead converting them to term loans to avail of higher repayments at regular intervals.

For cash credit (working capital limits), the borrower just needs to keep repaying the interest component, but once it is converted to term loans, the borrower has to start repaying the entire loan in instalments, said the second person cited earlier.

The state-run lender has more than ₹1 trillion in loans to non-banks.

“The bank (BoB) is not recalling loans from NBFCs, it is just telling them to start repaying the loan instead of just servicing interest. There is hardly any onward lending happening from NBFCs, so why should we provide them a cash credit limit?" said the person.

S.L. Jain, executive director of BoB, said on 24 January that companies have made repayments worth ₹9,954 crore in the fiscal third quarter, of which NBFCs accounted for ₹2,399 crore.

According to the second person, the increased repayment from NBFCs and housing finance companies (HFCs) is a result of its policy of converting credit limits into term loans.

BoB’s domestic advances grew 0.67% to ₹5.44 trillion from a year earlier, led by a growth of 15.31% in retail loans.

Soumya Kanti Ghosh, group chief economic adviser of State Bank of India, said RBI could seriously consider becoming the lender of last resort by providing liquidity against assets of non-banks.

“A formal arrangement could be made with the government of India of adjusting any haircut in the process with dividend transfers. Secondly, there could be deferment of principal repayments by systemically important 50 NBFCs and HFCs for a specified period," Ghosh said in a report on 17 January.