India’s largest lender, State Bank of India (SBI) is the new friend in need for non-banking financial companies (NBFCs). Investors in NBFCs lost no time in welcoming the liquidity lifeline that SBI threw on Tuesday and have driven up the stocks of these companies. SBI said it would treble the amount of loans it buys from finance companies to about ₹45,000 crore for the current fiscal year. The lender has on an average been buying small chunks of loan portfolios, roughly ₹15,000 crore every year, to meet its mandated priority sector targets. Media reports indicate that other banks will also begin to look at increasing purchases.
Such purchases through securitization methods like direct assignments are common among banks and largely involve priority sector loans and retail loans. But this is changing as banks are buying even non-priority sector loans, as a report from Crisil Ltd in August shows.
The rating agency has said that the volume in securitization doubled in the first quarter of FY19 led by non-priority sector loans. Banks are typically the biggest buyers of such securitized pool of loans.
The liquidity scare that the serial defaults by Infrastructure Leasing and Financial Services Ltd triggered had made banks hostile towards lending to finance companies and even some home loan lenders as well. The scare over probable rating downgrades of NBFCs would mean that lending to them would attract more risk weights and hence more capital by banks. The caution by banks on lending to NBFCs worsened their liquidity situation. When refinancing liabilities is looking tough, the obvious solution is to bring down the asset side growth to tide over short-term asset-liability mismatches (ALMs).
NBFCs benefit hugely through securitization as short-term liquidity problems get fixed and capital is freed up.
That said, NBFC stocks are still far lower than they were two months back. Despite the massive erosion in market capitalization of NBFCs, investors are still wary over valuations. Kotak Securities Ltd in a note said, “While NBFCs have managed liquidity challenges well, the focus now shifts to their ability to manage ALM in light of any new regulations.”
The benefits for banks are the increase in their loan book without bearing the cost of acquiring such loans. What is to be noted is that the SBI stock also rose, indicating that investors believe the lender will be cautious while buying loans. The hope is that banks would choose good quality portfolios and get them at a better price given that NBFCs are desperate for liquidity.