Credit growth, NPA reduction to depend on pace of economic revival: RBI

Indian banks are getting a better grip on their bad debt situation and non-banking financial companies (NBFC) are expected to regain their niche after a turbulent one year, but further reduction in bad debts and credit growth depend upon how fast the economy recovers from the slowdown, the Reserve Bank of India (RBI) said on Tuesday.
In this slowdown, banks and non-banks are shrinking their credit to the commercial sector, while uncertain times could increase the spectre of default in retail loans as well, the RBI’s Report on Trend and Progress of Banking for 2018-19 warned.

Credit to the commercial sector shrank by Rs 52,971 crore during April-September in the first half of 2019-20 from an expansion of Rs 3.66 trillion in the same period a year ago, the RBI said in its report. The risk-free retail segment doesn’t look that risk-free, either.
“While banks have oriented their lending towards the relatively stress-free retail, the slowdown in private consumption spending has imposed limits to this growth strategy even as the possibility of defaults among retail segments rises as growth slows down,” the report said.
But weakening growth impulses and subdued credit off-take, along with sporadic credit default events and incidents of frauds, are “exacerbating the reluctance to lend,” the report said, adding this “waning of confidence is weighing on overall economic activity”.
“The evolving macroeconomic scenario, and particularly, the ongoing loss of pace in domestic economic activity, present daunting challenges as widespread risk aversion has turned credit demand anaemic even as corporations deleverage their own stressed balance sheets,” the report said, adding this was taking hold at a time when recent improvements in asset quality and the profitability of the banking sector are at a nascent stage and the capital adequacy ratios of public-sector banks (PSBs) were being shored up through recapitalisation by the government. In this environment, even after having an effective bankruptcy code, the “overhang of NPAs remains,” and “further improvements in the banking sector hinge around a reversal in macroeconomic conditions”.
The banking system’s gross NPA (non-performing asset) ratio declined, after seven years, from 11.2 per cent in March last year to 9.1 per cent in March this year, and the sector became profitable in the first half of 2018-19 owing to lower provisioning.
Recapitalisation in this period also helped them shore up their capital adequacy ratios.
Recovery improved in the year due to the Insolvency and Bankruptcy Code (IBC). But recovery rates by other resolution mechanisms declined in 2018-19, especially through the mechanism of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act.
Credit growth, NPA reduction to depend on pace of economic revival: RBIIn 2018-19, 1,135 cases, involving Rs 1.67 trillion, were admitted by various Benches of the National Company Law Tribunal (NCLT). But the amount recovered was Rs 70,819 crore, or only 42.5 per cent of the amount admitted.
The RBI welcomed the decision of merging public-sector banks, stating that the exercise would likely “transform the face of the banking sector.”
“With the emergence of stronger, well-capitalised banks aided by cutting-edge technology and state-of-the-art payment systems, Indian banks have the potential to become global banking leaders,” the RBI said.
While the government and the RBI have played an active role in the revival of both banks and non-banks, “the need of the hour is to continue the policy co-ordination with a view to developing a vibrant and secure banking system and a competitive and resilient NBFC sector”.
However, the recapitalisation of public-sector banks remains an unfinished agenda. Banks need capital not only to meet the regulatory minimum but to guard against balance sheet stress, as well as to improve their valuation methodologies, credit monitoring, and risk management strategies to build resilience.
While private banks had taken over the space vacated by the risk-averse public sector banks, “fault lines are becoming evident” in the corporate governance of the private banking industry. This is happening at a time when public-sector banks’ balance sheets have not yet regained their strength.
Bank lending to NBFCs remained strong because of policy initiatives, but banks must focus on risk pricing to avoid building up excessive risk.
The balance sheet size of the NBFC sector was roughly 18.6 per cent of that of the banks. Therefore, faced with stress after the IL&FS crisis, the RBI and the government took measures to allay investor apprehension and aid NBFCs to perform better.
“Going forward, the Reserve Bank will continue to maintain constant vigil over NBFCs and take necessary steps to ensure overall financial stability,” the report said.
Urban cooperative banks continue to suffer from a low capital base, weak corporate governance, inability to prevent frauds, a slower adoption of new technology, and inadequate system of checks and balances. They need to break out of these drags, the RBI said, keeping in mind the recent scam at Punjab and Maharashtra Co-operative Bank (PMC).

The present economic crisis is worse than 2008 recession: Goldman Sachs

The consumption slump, a major challenge afflicting the economy, cannot be attributed to the NBFC crisis as it predates the first default by infra lender IL&FS, says a brokerage, which has also slashed growth forecast to 6 percent with a downward bias.
Many people attribute the deepening slowdown in consumption to the NBFC crisis that began in September 2018 when IL&FS went belly up following which consumption financing--a forte of shadow banks, stopped with a chill in disbursements by these players.

According to Prachi Mishra, the chief economist at Wall Street brokerage Goldman Sachs, her analysis indicates that consumption has been falling since January 2018, which is much before the end August 2018 default by IL&FS which triggered the liquidity crisis for NBFCs.
She said the fall in consumption is responsible for a third of the overall dip in overall growth, with the global slowdown coupled with funding constraints.
"There is a slowdown and the growth numbers have fallen by 2 percentage points," Mishra said, speaking at an event by The Economist.
However, she expects growth to tick up in the second half, courtesy the easy money policy of the RBI which has slashed the key policy rates by a record five times or by 135 bps to a decadal low of 5.15 percent since February and also the push to sentiment from the growth enhancing measures like the recent massive tax giveaways to corporates.
Mishra said investments and exports have been sliding for a long time, but it is the steep consumption slump which has is the new pain area.
"The present slowdown is protracted and has lasted for over 20 months now," Mishra said, adding this is different from the growth headwinds like demonetisation or even the 2008 financial crisis, which were temporary in nature.
The comments come amid growth slowing down to a six- year low of 5 percent in the June quarter, which has been followed by a rash of downward revision in growth estimates to the tune of 70-110 bps, including by the RBI which now expects the economy to expand by 6.1 percent and also by multilateral agencies like IMF and the World Bank.
Research by the brokerage points out that 40 percent of the pain is coming from the slump in global trade, over 30 percent from consumption slowdown and the rest is due to the severe funding constraints.
Addressing the same event, Srei Infra Finance chairman Hemant Kanoria said there is a need for the economy not to be "messed" around for political gains.
Kanoria said his company has cut down on disbursements and chosen to focus on holding on to liquidity for the rainy day, which has resulted in a sharp 30 percent dip in new construction equipment hiring.
Highlighting that this is a broader trend among the shadow banks, Mishra said NBFCs' credit growth has dipped to 13-14 percent now as against a growth of 24 percent till the recent past and blamed it on the slowing demand for loans, the increased regulatory pressures and a risk aversion.
NBFCs are show shy of lending that they are preferring to invest in government bonds rather than making loans, she said, adding this aspect needs to be broken.

RBI Guv Shaktikanta Das rules out asset quality review of NBFCs for now

Even as he reiterated the regulatory resolve to not let any large NBFC fail, Reserve Bank governor Shaktikanta Das Monday ruled out ordering an asset quality review of the systematically important shadow banks for now.
The over 12,000-odd non-banking financial institutions, coupled with their housing finance peers, collectively control a quarter of the credit market, have been under severe stress following the bankruptcy of one of the largest players IL&FS group last September.

The IL&FS group owes close to Rs 1 trillion to the system and more than half of that is to banks, mostly state- owned ones. Its failure has made banks highly risk averse to the NBFC sector, leading to a severe liquidity crunch.
The group is not only under bankruptcy process now but also under many a probe including by the ED, CBI and the SFIO.
Addressing the press on the sidelines of the national banking conference being organised by the industry lobby Ficci, Das ruled out ordering an asset quality review of the large NBFCs, says the RBI is not thinking about conducting one for now as it had done for the banks in late 2016 and early 2017, under which it identified 40 largest stressed accounts and asked banks to send for bankruptcy resolution.
"At the moment there is no such proposal to have an asset quality review on NBFC but while saying that let me also add that 500odd NBFCs and HFCs are closely being monitored by us and our monitoring and supervision include all aspects of their functioning, including their capital adequacy, stability, their cash inflow, outflow," Das told reporters.
He said the RBI is keeping a close watch on the interconnectedness of banks and non-banking finance companies and reiterated that the monetary authority will not let any of the top 50-odd NBFCs to fail.
"It is our endeavour to ensure that no large NBFC collapses," Das reiterated and said the objective of the RBI is to harmonise the liquidity requirements for banks and non- banking finance companies.
"It is our endeavour to have an optimal level of regulation and supervision so that NBFCs are financially resilient and robust. We will not hesitate to take whatever steps are required to maintain financial stability in the short, medium and the long-term."
Stating the objective of the regulation is to harmonise the liquidity norms between banks and NBFCs, taking into account their unique business models, he said, "we are also looking at governance and risk management structures in NBFCs" and recalled that as late as in May 2019, RBI had asked NBFCs with a size of over Rs 5,000 crore to appoint functionally independent chief risk officers with clearly specified role and responsibilities with a view to bring in professional risk management system.
On the housing finance companies, some of which are also in trouble following the NBFC crisis, and whose regulatory remit has been vested with the RBI after being taken away from the National Housing Bank since the July budget, he said all the regulations put in place by the NHB will continue for HFCs, but RBI is in the process of reviewing some of the norms.
Das explained that bringing HFCs under the regulatory ambit of the Reserve Bank is a significant move, given their asset-liability profiles.
Including HFCs, the size of the NBFC sector constitutes about 25 percent of combined balance sheet of scheduled commercial banks. The Reserve Bank will take necessary measures to deal with these challenges, Das said.
Pure-play housing finance companies like Dewan Housing is on the verge of collapse following the credit crunch created by the fall of the IL&FS group.

Crisis-hit NBFC sector sees private equity investments growing 88% in 2018

Private Equity (PE) investments in India’s non-banking financial companies (NBFCs) in the January-November period of this year has reached $2.041 billion — 88 per cent more than full 12 months of 2017 and the highest in four years. The increase in overall PE investment value has been despite the number of deals this year being lower than last year, and the sector facing a liquidity crisis.
According to data from Venture Intelligence, the NBFC sector has received a total of $2.04 billion in 25 PE investment deals so far this calendar year, compared with $1.09 billion in 32 deals during full 2017.

Among the biggest such deals was the $1,06-million KKR-GIC investment in HDFC Ltd in January 2018. Besides, two major PE deals were announced last week — TPG Growth-led $42-million equity investment in Ess Kay Fincorp, and the Rs 2-billion investment by Norwest Venture Partners X, CDC Group Plc, UK’s Development Finance Institution and P Surendra Pai in Chennai-based Veritas Finance Pvt Ltd.
According to experts, you could see more deals in the pipeline being announced in the coming months, as many funds believe the present time is an opportunity to acquire portfolios and assets at reasonable valuations. And, these funds are also bullish on the long-term scope and prospects of the NBFC sector.
The recent PE investment surge in the NBFC sector is noteworthy, coming as it is at a time when many listed non-banking financial companies have seen significant erosion in their market value due to asset-liability mismatches, tightening of liquidity in the short-term money market, and a reduced ability to seek higher short-term borrowings to fully meet their repayment obligations.
On the crisis facing the country’s NBFCs, Sumer Juneja, director at Norwest Venture Partners, which has invested in various NBFCs like Shriram City Union and Chola Finance, says the valuations of these companies were too high and were due for a correction. Also, some companies were not reporting their non-performing assets properly, he explains. “Issues with NBFCs are very company-specific and the RBI will react.”
Norwest, says Juneja, chooses companies like Veritas that create value, and have quality assets on its book, along with transparency. He expects the company to increase its assets under management significantly over the coming years.
Veritas Finance Managing Director & Chief Executive Arulmany D is optimistic, too. "NBFCs have weathered many storms in the past and will overcome the current liquidity crisis as well. The crisis could lead to certain regulatory interventions to support the NBFCs. That only augurs well for the long run," he says.
NBFCs operate in a niche segments and have over time developed robust processes and skillsets to address the needs of diversified and heterogeneous segments of society, with sustainable business models, he reasons.
Another senior executive of a PE firm who does not wish to be named says that investors are excited about the growth opportunities in Indian private financial space. More transparency and better governance will allow easier access to capital, he says.
The NBFCs that are facing problems at present are those that have tried to grow too fast and diversified into non-core areas. Those that adopted a monoline approach over time have done well, he says. Many of the issues that have arisen today will only strengthen long-term corporate governance and operating capabilities of these companies.
Norwest’s Juneja says banking and finance are a large part of India's economy, as credit is its backbone. Credit access in the country is under-penetrated, and businesses need capital to be able to grow. “There might be issues with certain companies, if their valuation expectations are high, but nobody can ignore the banking and NBFC sector,” he says.
First Published: Thu, November 08 2018. 0