In an event attended by representatives from micro, small and medium enterprises, banks, NBFCs and other financial institutions, finance experts took part in a panel discussion that highlighted the checks and balances of the NBFC scenario. Rajesh Rajgor reports.
MVIRDC World Trade Centre Mumbai and All India Association of Industries (AIAI) conducted a panel discussion on ‘Strengthening the NBFC Sector’ in Mumbai. Experts representing different segments of the industry took part in the event. Those on the panel included K.V. Srinivasan, Director and Chief Executive Officer, Profectus Capital; Umesh Revankar, Managing Director and CEO, Shriram Transport Finance; Vijay Deshwal, Head – Services Sector Group, Wholesale Banking, ICICI Bank; Mahesh Thakkar, Director General, Finance Industry Development Council (FIDC); Sunaina DaCunha, Senior Fund Manager, Aditya Birla Sun Life AMC; Firoze Andhyarujina, Senior Counsel, Supreme Court of India, and Legal Advisor, MVIRDC World Trade Centre Mumbai; and Krishnan Sitaraman, Senior Director, Financial Sector and Structured Finance Ratings, CRISIL.
In his opening remarks, Firoz Andhyarujina said: “The current NBFC crisis brings to the fore the role of credit rating agencies, identification of sound NBFCs, role of auditors and role of independent directors. Slowdown in NBFC financing has affected automobile and real estate sectors, thereby claiming at least 2.5 lakh jobs. The impact of this crisis is not only on a few sectors but on the entire economy. Therefore, we need to come up with a mechanism to segregate financially sound NBFCs from weak ones.” The current NBFC crisis has been largely misunderstood and has attracted disproportionately kneejerk reaction from the media. “It is high time to place the truth in the right perspective. After one year of this crisis, people have come to the conclusion that the days of panic in the sector have passed,” he added.
“There is no need for asset quality review in this sector. NBFCs play a major role in providing last mile connectivity and bringing small enterprises to the formal financial sector. NBFCs cater to 70% of first-time borrowers and they contribute 40% of the total credit to the MSME sector,” said K.V. Srinivasan, who also moderated the panel discussion. Elaborating about the misconceptions surrounding this crisis, Srinivasan added: “NBFCs are well regulated by the RBI. By and large the guidelines for banks and NBFCs are same. A time has come to adopt a forward-looking approach based on the lessons learned from this crisis.”
Opening up liquidity window for NBFCs
In his remarks, Umesh Revankar pointed out that the current NBFC crisis is not the only reason for a slowdown in the automobile sector. He attributed the slowdown to a slew of regulatory changes, weak monsoon and slackness during the election season. He informed: “Vehicle buyers are delaying their purchase decisions awaiting clarity on the government’s emission standards and introduction of electric vehicles in the market.” In order to address the funding crisis in the NBFC sector, Revankar suggested small NBFCs to tap the capital market through public and private issuance of debentures for raising capital, instead of just depending on banks for funds. He also advised NBFCs to take prudent decisions on pricing and managing margins in their lending activity.
Vijay Deshwal opined: “I strongly feel that the NBFC sector will emerge strong from the lessons of this crisis as the players will re-align their capital structure and leverage, improve governance and transparency. The lessons from this crisis will help banks and NBFCs partner with a risk-calibrated approach. The collaboration of banks and NBFCs will grow stronger through co-origination, liability franchise and securitization.” He denied the perception that banks withdrew all credit lines to NBFCs at the height of the crisis. He clarified that banks were the major source of capital to NBFCs through securitization. Mahesh Thakkar, in his address, said: “The government and the RBI must act proactively and send frequent signals about the funding situation taking a turn for the better.”
“The government must also take a slew of steps such as allowing on tap issuance of non-convertible debentures, permitting refinance of ‘Mudra’ loans and opening separate refinance window for NBFCs. These steps will help strengthen the financial position of NBFCs and promote fresh lending from this sector,” Thakkar added.
Providing an overview of the situation, Krishnan Sitaraman said: “The funding problem for NBFCs is not as grave as it is made out to be. In fact, during May-July 2019, NBFCs have managed to raise 70% of total funding that they raised in the corresponding period last year. The asset quality of retail lending NBFCs is steady, while the asset quality of standalone, wholesale lending NBFCs have deteriorated. NBFCs with sound governance and asset liability management have no problem in raising finance. This crisis situation is a period of adjustment for the NBFC sector.”
Sunaina DaCunha observed: “We should not paint the entire NBFC sector with the same brush. NBFC is a heterogeneous industry comprising housing finance companies, micro lending institutions, auto finance companies and structured finance institutions. The market is discerning and they can differentiate between weak and strong borrowers. Companies with strong balance-sheet and backing from large corporate houses do not face difficulty in accessing capital.” In order to ensure alternative source of finance for NBFCs, DaCunha suggested the development of corporate debt market by introducing standardisation of debt issues, documentation and governance norms, infrastructure for listing and trading securities, and transparency in data sharing.