Home >Industry >Banking >Small non-bank lenders turn wary of extending new wholesale loans

MUMBAI : India’s smaller non-bank lenders are turning choosy about giving new loans and are selling existing wholesale loans, as they cherrypick the best customers and build trust with banks that lend to them.

Such risk aversion was last seen among banks in 2012, when they fled to safer retail loans after corporate bad loans soared.

The non-banking financial companies (NBFCs) are reorganizing themselves today, said Nirmal Jain, chairman and chief executive, IIFL Finance Ltd. “Things are not very easy."

IIFL Finance has halted new wholesale loans and hopes the book will reduce over time. “We are looking at selling these loans but not at an unreasonable price," he added.

According to Jain, while the situation has slightly improved since June, banks are more comfortable lending to retail NBFCs but cagey with regard to smaller ones and those engaged in wholesale lending.

“We are going very cautiously on new loans. We have made changes like asking for a higher Cibil score (from 675 earlier to 750 now) and have also reduced the threshold for customer leverage ratio," said Jain. The company has 12% of its total assets in wholesale loans and the rest in retail.

Experts also warned of increased liquidity problems for NBFCs extending wholesale loans.

“Liquidity stress could be high for wholesale lenders with large exposure to property developers, companies without a strong parent, or companies with perceived weak governance," S&P Global Ratings said in a note on 26 June. IIFL Finance’s large real estate loans alone are worth 3,500 crore.

According to Nachiket Naik, head of corporate lending at non-bank lender Arka Fincap, the real estate and structured credit lending business need patient capital as repayment of a large part of these loans is predicated on event-based takeouts or refinancing, which is difficult to time, especially in a downturn.

“Funding such a portfolio through leverage from banks and capital market debt may not be most appropriate, as in a downturn of the business cycle, this may result in asset-liability management (ALM) mismatches," said Naik.

Another non-bank financier, Edelweiss Financial Services, is selling its wholesale loans and looking to reduce it to zero in two years.

The company’s wholesale loan book has shrunk 28.5% sequentially and 41% on a year-on-year basis to 8,393 crore in the March quarter. “We want to bring it (wholesale loans) down to zero by 2022. We will do it as an asset management business," Rashesh Shah, chairman and chief executive, Edelweiss Financial Services, told analysts on 6 July. Shah said that the project and construction finance business has a lot of uncertainty around cash flows. “If you do it in the fund format, then you take ALM risk and NPA (non-performing asset) issue out of the way," he said.

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