There’s no denying that NBFCs have come to play a far more important role in India’s financial sector over the past few years, when many Indian banks saddled with bad loans started shrinking their balance sheets.
On Tuesday, India’s largest bank, SBI, said it would purchase good quality asset portfolios from Non Banking Finance Companies (NBFCs) worth Rs 45,000 crore. The bank sees an opportunity to expand its loan portfolio at attractive rates and to help it meet its priority sector targets in areas such as the farm sector, SME infrastructure and the social sector. Last month, after reports first emerged of NBFCs being squeezed in the wake of defaults by IL&FS and the dissolution of its board, the SBI had offered to provide liquidity support while indicating that it would not cut back on lending to NBFCs. If there are concerns now being expressed about the state-owned lender buying into assets of NBFCs, it is because of the experience of another state backed entity, LIC, which had invested in IDBI Bank and ONGC being weighed down after the buyout of HPCL.
That’s why it is all the more important for the bank to go the extra mile in ensuring the quality of the portfolio it acquires from NBFCs. There’s no denying that NBFCs have come to play a far more important role in India’s financial sector over the past few years, when many Indian banks saddled with bad loans started shrinking their balance sheets. NBFCs filled this void, as reflected in the fact that bank lending to this segment now aggregates Rs 4,73,000 crore, making up 19 per cent of overall credit, while the exposure of mutual funds to these companies in the form of investment in their commercial paper and non-convertible debentures has grown substantially. Over the last few years, the NBFCs have expanded with the RBI now supervising over 11,100 such firms of which 249 are non deposit taking but systemically important, even as the regulator is engaged in a crackdown against those that are non-compliant, inactive and have not fulfilled capital norms.
The RBI’s recent observation that the sector is overall quite strong should offer comfort though the regulator has flagged potential risks because of rollover of short-term borrowings, including by housing finance companies. It may well be that the SBI decided to move aggressively on portfolio purchase of loans from NBFCs after the RBI unveiled new rules for co-origination of loans — which are aimed at leveraging the reach of NBFCs while helping banks meet their priority sector targets, with joint involvement of both in lending and sharing of risks. The onus is now on the SBI to demonstrate that the portfolio purchase of NBFC loans rests on prudent commercial reasons and that the decision is not a forced one.