Experts said that while the moratorium will help borrowers, it is not the most effective solution to the problem
The six-month moratorium on loan repayments will hurt the balance sheets of Indian non-bank financiers as while their borrowers have availed of the deferment, these companies have not got similar relaxations from banks, said experts from the financial services sector.
Speaking in videoconference at CII’s Annual Session 2020 on Tuesday, these experts said that while the moratorium will help borrowers, it is not the most effective solution to the problem. Moderated by Sanjiv Bajaj, managing director, Bajaj Finserv, other speakers on the panel included Sanjay Nayar, chief executive, KKR India; Abhimanyu Munjal, chief executive, Hero FinCorp; Amit Chandra, managing director, Bain Capital Private Equity; and Krishnan Ramachandran, chief executive, Max Bupa Health Insurance.
“To benefit borrowers, we know that the RBI has introduced a moratorium on all loans and has extended it by another three months. This is causing some worry for non-banking financial companies (NBFCs) who will not get paid by borrowers for six months but on the other hand, have to pay back to the banks,” said Bajaj.
Bajaj added that therefore, at the end of the moratorium period, there could be much higher non-performing assets (NPAs) and lot of work going into collections. “It could end up hurting the balance sheets,” he said.
According to Nayar, the moratorium is purely a survival tactic and just pushes the can down the road as the underlying quality of cashflows of the borrower would actually be getting worse.
“I think, six months later when the moratorium lifts, you will be staring at a weaker business unless you really believe that the moratorium has given that borrower time to get better. I belong to the camp that believes it (moratorium) is a very interesting reaction to a problem but not a solution,” said Nayar.
Nayar said that the solution lies in a one-time restructuring as the sector is going to be faced with NPAs and a much weaker credit book when the moratorium is over.
Lenders had sought a relaxation on provisioning norms from the Reserve Bank of India on debt recast, a proposal that the regulator has not yet accepted.
Hero Fincorp’s Munjal also believes that one-time restructuring is a solution to the covid-19 situation. He said, the worry is that retail customers may become habituated to not paying and six months is a very long time.
“The rural customer starts thinking it is their right to not pay. There is a moral hazard there and I think NBFCs and banks have to spread awareness among their customers that de-sell the moratorium,” said Munjal. By de-selling he means sensitising customers about the deferment, including its disadvantages.
Foreign banks already aware of the impending risks have begun negotiations to sell loans held by them, including those given to some of the best rated corporates in India
MUMBAI : A clutch of foreign lenders with large exposures to Indian corporates may be forced to sell loans held by them with the latest revision of India’s sovereign ratings by Moody’s, downgraded to the lowest investment grade category on Monday.
According to multiple people aware of the ongoing negotiations, foreign banks already aware of the impending risks have begun negotiations to sell loans held by them, including those given to some of the best rated corporates in India.
“Most foreign banks follow the sovereign ceiling policy practiced by all major rating agencies which means that if there is a downward revision of sovereign rating, the credit rating of corporate debt issuers of that country will fall in tandem irrespective of the issuer’s financial standing” said the first person cited above.
“In such situations they typically reduce their exposure by exiting or part selling their loan portfolios” the first person added.
A second person, senior banker in one of the largest foreign banks in India said that many banks will be forced to sell their profitable assets as India’s risk increases. “These are top corporates in the country and we are hoping that there will be a good demand from Indian banks,” said the foreign banker. For Indian banks however this could be favourable development given their risk averse stance in the recent months.
Having burnt their fingers in the last round of assets turning bad many Indian banks have turned picky about whom they lend to and therefore top-rated borrowers are always a big draw. While banks in India already have exposures to large corporate groups, the recent RBI regulations that allowed increase in group exposure by 5 percentage points to 30% of their capital, albeit temporarily, will be useful.
According to the second person cited above, any further downward revision in India’s country risk will likely cause a major disruption. “In that case, our head offices would expect us to significantly and immediately reduce our exposure in India,” he said. The Moody’s downgrade of India’s sovereign rating to Baa3 is a notch away from junk status and is now at par with S&P’s BBB- rating.
As of 31 March, 2019 (latest available), foreign banks had an outstanding credit of ₹4.03 trillion in India, 1.5% lower than the previous financial year, showed data from the Reserve Bank of India. Public sector and private sector banks had outstanding credit of ₹57.72 trillion and ₹32.58 trillion, respectively, as on 31 March, 2019.
The second person said that while foreign banks need to cut their exposure in India if the risk assessment changes, the central bank and the government do not take such actions lightly. He said that the regulator and the government is irked that a foreign bank is not serious about its presence in India.
“Some might just stay put until there are any further changes in ratings after what happened on Monday and instead of selling loans they might stop new loans,” the second person said. As of September 2019, there were 46 foreign banks who were present either through branches or through a wholly-owned subsidiary and another 37 banks that only have representative offices.
An analyst at a credit rating agency said that most of the time when a foreign bank originates a large loan in India, a lot of that gets booked overseas because domestic branches do not have that much capital to disburse the entire loan. “Foreign banks will now look to downsell some of these large loans as the country’s risk will go up. That said, these banks were already adopting a wait and watch strategy owing to India’s handling of the covid-19 situation and the consequent economic impact,” the analyst said.
The bank will offer loans predominantly for agriculture and allied activities and micro and small enterprises under the new vertical
About 8,000 branches in rural and semi-urban areas have been identified to provide specialised services to the micro segment
MUMBAI: India’s largest lender State Bank of India (SBI) on Tuesday said it has created a separate vertical to focus on financial inclusion and micro markets (FI&MM).
The bank will offer loans predominantly for agriculture and allied activities and micro and small enterprises under the new vertical.
“In a major restructuring exercise, SBI has created a separate FI&MM vertical within the bank with an exclusive focus on financial inclusion and micro markets, especially in rural and semi-urban areas,” the bank said in a statement.
Under this plan, about 8,000 branches in rural and semi-urban areas have been identified to provide specialised services to the micro segment including credit for small businesses and farmers.
SBI said it also aims to improve service quality and availability of banking services through the bank’s network of over 63,000 customer points in rural, semi-urban, urban and metro areas
Rajnish Kumar, chairman, SBI, said the new FI&MM vertical will provide an opportunity to serve the small business, agriculture and allied segment so that they can run their businesses smoothly, especially in the current times of uncertainty.
“The creation of the FI&MM vertical was conceived, created and implemented fully in-house,” said Kumar.
The vertical will be headed by Sanjeev Nautiyal, a deputy managing director (DMD) at the bank, at the national level, . The vertical will comprise a four-tier structure under the chief general manager, general manager, regional managers at regional business offices and district sales hub to strengthen the credit delivery system and improve the turnaround time for quick sanctions and disbursals, the statement said.
The new vertical has been set up mainly for addressing investment credit needs of agriculture and small borrowers
SBI to offer micro credit through nearly 8,000 rural and semi urban branches pan-India
Experts said smaller and weaker NBFCs have either not been able to raise money or have had to settle for less at higher rates
NBFC funding market has been improving since February but the covid-19 pandemic and Yes Bank bailout have raised costs for these firms
MUMBAI: Smaller and weaker non-bank financiers face more difficulty in raising debt compared to their peers with stronger parentage as risk aversion intensifies amid the covid-19 crisis.
The covid-19 pandemic has affected the funding of most non-banking financial companies (NBFCs) with bond spreads over the three-year government securities rising by another 50-70 basis points (bps), against the 250-300 bps existing spread.
Spreads indicate the difference between yield of a particular bond and yield on the government securities (Gsec), with same maturity.
Experts said smaller and weaker non-bank financiers have either not been able to raise money or have had to settle for less at a higher rate. For instance, Aadhar Housing Finance Ltd and IndoStar Capital Finance Ltd informally tested the waters in the last few months but decided against resorting to bond markets owing to tepid investor interest. IndoStar recently raised ₹1,225 crore from Brookfield, but in equity capital.
While IndoStar declined to comment, an email sent to Aadhar Housing remained unanswered till the time of press.
Ajay Manglunia, managing director (MD) and head at JM Financial Products Ltd said spreads have widened for all non-banks since the onset of the coronavirus-led national lockdown, instead of contracting despite the flow of liquidity.
“Although there has been a surge in liquidity after RBI’s (Reserve Bank of India) measures, the spreads have gone up for non-banks. Stronger ones are still being preferred by the bank and weaker NBFCs and housing finance companies (HFCs) where there has been rating downgrades, the scenario is worse. The market is fearful about leverage and unsure about how covid-19 is likely to impact cashflows,” said Manglunia.
However, the increase in spread does not mean the cost of capital has gone up because the Gsec yield has also declined. It indicates the risk assessment of investors, still wary of these smaller lenders’ ability to repay. The yield on the 10-year benchmark bond has dropped by 45 bps since the beginning of the lockdown, closing at 5.77% on Monday. Similarly, the yield on the five-year government bond has fallen 91 bps in the same period.
The problem for NBFCs also rise from the fact that banks have been very selective in granting the three-six-month moratorium, though their customers have availed it. This has led to concerns over asset-liability problems for non-bank financiers who have not been granted the deferment.
“Some 10-23% of borrowings for NBFCs are due for maturity over the next six months (April-September 2020). With 30-75% of loans under moratorium, loan book repayments would now be sharply lower until 31 August,” said the Credit Suisse report. Consequently, NBFCs would have to dip into their cash balances (5-16% of their balance sheets) to meet repayment obligations and avoid defaults, it added.
Arvind Chari, head-fixed income and alternatives, Quantum Advisors Pvt Ltd said the market is clearly differentiating between well-run NBFCs, good promoter backing and safer segments.
“Weaker ones are either not able to raise money at all or are able to raise money at a higher rate and in small amounts. The covid-19 situation has just compounded all of this,” said Chari.
As part of changes, some matters will be left to lead bank for faster decision-making
Under ICA, lenders jointly appoint a lead bank which functions on behalf of the entire group, and crafts a resolution plan to be approved by two-thirds of the members
The drop in non-food credit was however driven by a fall in lending to individuals and micro and small enterprises
MUMBAI : Bank loans to non-banking finance companies rose by ₹5,000 crore in April to touch ₹8.12 trillion, RBI data showed, at a time non-food credit fell by ₹1.1 trillion. However, this is sharply lower than the March figures, when bank lending to NBFCs grew by ₹1.15 trillion, the biggest surge since January 2008.
To be sure, the April data does not include the funds banks would have invested in the corporate bonds of NBFCs under the Targeted Long Term Repo Operations (TLTRO) Scheme. RBI had made available three-year funding worth ₹1 trillion under the TLTRO window. It opened a separate TLTRO window for NBFCs and microfinance companies with a lower rating, which were denied funding in the first round.
The drop in non-food credit during April—which coincided with Lockdown 1.0, and the first half of Lockdown 2.0—was however driven by a fall in lending to individuals under the personal loan segment by ₹63,000 crore and to micro and small enterprises by ₹23,000 crore. In the personal loan segment, the sharpest drop was seen in borrowing through credit card outstanding and advances against fixed deposits by over 10%.
However, initial signs of consumer demand pick-up is visible with bankers reporting loan applications and disbursals in areas where curbs are getting eased.
“As India plans to enter a planned exit in June, available trends suggest that bank credit growth has shown signs of a very nascent pick-up in the second fortnight of May. We need to ensure that such trends pick up pace before the economy opens up,” said Soumya Kanti Ghosh, group chief economic adviser at State Bank of India.
Last month, finance minister Nirmala Sitharaman had announced an emergency credit line guarantee scheme
The collateral-free loan will enable the micro, small and medium enterprises (MSMEs) to pay salaries, rent, and restocking expenses
State-owned lenders sanctioned loans worth ₹3,200 crore for small businesses on June 1 under the recently announced emergency credit line guarantee Scheme, the finance ministry said on Monday.
The promoter stake has to be brought down to 26% by August
Kotak’s stake in Kotak Mahindra Bank now stands at 28.93%
MUMBAI: Kotak Mahindra Bank promoter Uday Kotak will sell up to 56 million shares through a block deal on Tuesday to reduce his stake in the bank to 26.1%, according to a person aware of the development.
The interest on savings account for balance up to ₹50 lakh has been lowered to 3.5%
This move comes after RBI announce an off-cycle repo rate cut by 40 basis points to 4% last month.
Private sector lender Axis Bank Ltd cut interest rate on savings account by 25 basis points with effect from Monday.
The interest on savings account for balance up to ₹50 lakh has been lowered to 3.5%. For balance above ₹50 lakh, the interest rate stands at 3.5%.
This move comes after RBI announce an off-cycle repo rate cut by 40 basis points to 4% last month.
Last month Kotak had lowered the interest rate on savings accounts by 25 basis points to 3.5%. Among banks, State Bank of India continues to have the lowest savings account interest rate at 2.75%.
Axis Bank had reported a surprise ₹1,388 crore loss for the fourth quarter, as it set aside funds to cover potential loan losses due to the coronavirus-driven downturn.
The bank’s average savings deposit grew by 13% year on year to ₹1.60 lakh crore for fiscal year 2019-2020 compared to ₹1.4 lakh crore in the previous fiscal. Average current account deposits grew by 11% year on year to ₹74,300 crore.
The bank’s current and savings account ratio of total deposits (CASA) stood at 39% in the March quarter compared to 41% in the previous year.
According to the Reserve Bank of India’s sectoral deployment of credit data for April, loans to NBFCs grew by ₹5,000 crore to ₹8.12 lakh crore, compared to March as banks continued to lend to better-rated entities
MUMBAI: Even as bank non-food credit fell by ₹1.1 lakh crore in April, lending to non-banking finance companies (NBFCs) continued to grow. According to the Reserve Bank of India’s sectoral deployment of credit data for April, loans to NBFCs grew by ₹5,000 crore to ₹8.12 lakh crore, compared to March as banks continued to lend to better-rated entities.
However, this is sharply lower than the growth seen in bank lending to NBFCs in March, which expanded by ₹1.15 lakh crore, the highest since January 2008.
The April data does not reflect the funds banks would have invested in the corporate bond papers of NBFCs under the Targeted Long-Term Repo Operations (TLTRO) window. RBI had made available three-year funding worth ₹1 lakh crore under the TLTRO 1.0 window. Separately, the central bank had also opened a separate TLTRO 2.0 window exclusively for those NBFCs and micro-finance companies with a lower rating, which were denied funding in the first round.
The drop in credit during April, which coincided with the first phase of the national lockdown and first half of lockdown 2.0, was however, driven by fall in lending to individuals under the personal loan segment by ₹63,000 crore and to micro and small enterprises by ₹23,000 crore. Within the personal loan segment, the sharpest drop was seen in borrowing through credit card outstanding and advances against fixed deposits by over 10%.
However, initial signs of consumer demand pick up is visible with bankers reporting loan applications and disbursals in areas where lockdown curbs have been eased.
“As India plans to enter into a planned exit in June, though continuing within the overall ambit of lockdown, available trends suggest that bank credit growth has shown signs of a very nascent pick up in the second fortnight of May. Most importantly, Bank Credit to NBFC sector continues to grow. We need to be vigilant and ensure that such trends pick up pace before the economy opens up,” said Soumya Kanti Ghosh, group chief economic advisor at State Bank of India.
The government and RBI have announced a series of measures to help improve liquidity condition of NBFCs, these measures have been mostly ineffective
MUMBAI: The Reserve Bank of India’s decision to extend loan moratorium by another three months is credit negative for non-banking finance companies, according to rating agency Moody’s Investor Services.