The Covid-19 has had a debilitating impact on non-banking finance companies (NBFCs). While the government and the Reserve Bank of India (RBI) have initiated a number of steps to cushion the impact of the pandemic, it appears that the measures announced so far are not sufficient.
Srei, one of the systemically important NBFCs in India, is among the few that has been resilient despite the Covid-19 outbreak. In an exclusive interview with Business Economics, Hemant Kanoria, Chairman, Srei, shares insights on the strategies adopted by the company to survive this period of pandemic and suggests certain practical steps that are required to offer long-term support to NBFCs and their customers. Edited excerpts:
Q. The Finance Minister, Nirmala Sitharaman, has been meeting bankers. A lot of discussion has been happening on the proposed one-time loan restructuring programme. What are your views on this subject?
A: It is encouraging to see that the Finance Minister is constantly reviewing the framework created for the revival of economy and businesses. We hope that there is discussion on the proposed one-time loan restructuring programme and the apparent anomaly of not allowing NBFCs to restructure their borrowings gets addressed. It is critical for the overall stability of the financial system. The Finance Minister should also encourage banks to resume lending. Lending by banks and NBFCs has a multiplier effect on economic growth. Unfortunately, banks have become ultra cautious and have virtually stopped lending. This is impeding economic recovery.
Q. What are your views on the RBI's proposed one-time loan restructuring scheme?
A: The government and the RBI have been making genuine attempts to alleviate the problems of the industry. However, it appears that the proposed restructuring programme was designed without consulting the industry. By not allowing NBFCs to restructure the loans they have borrowed, we are creating a situation where there could be serious mismatch in their cash flows. NBFCs are not manufacturers of goods; they borrow money from banks and the wholesale market. If NBFCs are asked to restructure the loans that they have offered to their clients, it is only fair that they should be allowed to get their borrowings restructured. There are several unrealistic deadlines and impractical conditions to adhere to in the guidelines which can severely curb the efficacy of the entire restructuring process.
Q. What changes would you suggest in the proposed restructuring plan?
A: In this period of pandemic, we need policies that are simple, effective, and practical. NBFCs service MSMEs, millions of entrepreneurs and self-employed individuals. In absence of regulatory and policy support, NBFCs ability to service these segments will be severely hampered.
Ideally, the restructuring exercise should be left to the lenders and borrowers. The lenders, on the basis of the assessment of the borrowers' future cash flows, are best placed to decide the restructuring plan. The central bank, based on its assessment of financial and systemic risks, may prescribe general provisioning requirements or suggest revisions in the capital adequacy for the lenders.
Q. NBFCs appear to be in a tight spot. Apart from denying loan restructuring, banks have also stopped offering fresh loans to these companies. How will NBFCs survive in such a hostile environment?
A: It is a difficult operating environment for NBFCs. NBFCs are usually not allowed to accept deposits, they largely depend on banks for their funding requirements. Also, with the moratorium directives, repayments – the other source of cash flow – have stalled. Hence, there is a struggle for survival. Ultimately the survival will depend on the strategies adopted by different NBFCs and their management. A few large NBFCs with institutional backing and those backed by the government may still be able to steer their operations through this challenging phase, but others will have to work out survival strategies.
Q. What strategies have been adopted by Srei in this environment?
A: We have been focusing on growing our equipment finance business and it will continue to be our area of focus going forward. We believe that this is a sector where recovery will eventually happen, even if it takes time. India will need to spend on infrastructure in order to grow and that will drive the growth of this sector. We have even tied up with several banks to expand our business through the co-lending model. A few years ago, we had taken a conscious decision to exit our infrastructure project finance business in order to de-risk our balance sheet. In the hindsight, given the current environment, the decision proved to be a good one. At present, our focus is on strengthening our client relationships further, controlling costs and improving productivity. We are also taking initiatives to keep our employees motivated and morals of all our stakeholders high.
Q. Will mergers between NBFCs help?
A: Consolidation between NBFCs may not offer a solution to the problems. We must encourage merger between banks and systemically large NBFCs. It has happened in the past and there are several success stories from such mergers. That will provide a long-term solution to the current liquidity conundrum for NBFCs and will help in expanding the reach of banking services to a large number of MSME customers.
Q. Considering the heterogeneous nature of the NBFC industry, a one-size-fits-all strategy may not work for this sector. What could be the solution?
A: The RBI should consider creating an expert panel for NBFCs under the leadership of one of its executive directors. This expert panel should evaluate the challenges faced by different types of NBFCs and suggest measures that are customised for each category. For instance, the problems of asset finance NBFCs would be different from the challenges faced by home finance NBFCs or gold loan companies. Hence, the approach should be different. The government should also consider creation of an institution which would act as a refinancing agency to support NBFCs, much like the National Housing Bank (NHB), which supports the housing finance companies.