Crisis hit NBFCs put loans on sale with discounts, but banks fearful

Banks are cherry-picking assets as non-banking financial companies (NBFCs) put out their loan portfolios on sale for discount. To ring-fence themselves, banks are putting the onus of a default on the NBFCs with a first loss guarantee. Under this, the seller agrees to compensate some part of the delinquencies, if there are any.

Lakshmi Narasimhan, executive director, Shriram City Union Finance, said, “We sold two vehicle loan portfolios of about Rs 250 crore to Rs 300 crore to a bank last week. But you must see it only as an additional funding strategy, especially for companies like ours where the weighted tenure is not more than three years. ALM (asset-liability mismatch) issues are not relevant.”

A senior banker said, “We have stopped funding based on ratings. We give fresh lines of credit only if ALM is not there. We are also keeping a first loss guarantee.”

Banks are also curtailing fresh lending to NBFCs based on the external ratings. Instead, they have stepped up purchasing their portfolio to meet targets for agriculture and other priority sector lending targets.

M&M Finance, one of the largest financiers to tractor and auto finance in the NBFC space beside mortgage loans, said its funding costs have gone up in the last one month.

V Ravi, executive director and chief financial officer, M&M Finance, said, “For well-managed companies like ours, there is adequate money available but at a higher cost. Before committing for  higher cost, we will be careful to study the impact on our margins and take a calculated decision. For certain companies, the availability of long-term funding would be a challenge, even at a higher cost. We will consider all options of raising money, including the sale of portfolio within our internal prudential limits.”

With MFs curtailing their investments in the debt market as they are under redemption pressures, there are liquidity issues for certain NBFCs that give longer tenure loans such as housing and infrastructure loans. “Our corporate bond market is not deep enough to provide long-term funding. So the longest tenure is only five years to fund a 10-year asset, which creates funding mismatches. But for NBFCs like ours which deal in shorter tenure loans, this is not an issue,” Narasimhan said.

Meanwhile, SBI said in a statement that it is stepping up its target for purchase of a good quality portfolio of assets from NBFCs, as it believes that there is a good opportunity to expand its loan portfolio at attractive rates. The bank is looking for opportunities both in priority and non-priority sectors.

“The bank had initially planned for a growth of Rs 15,000 crore through portfolio purchase during the current year, which is now being enhanced. As per the bank’s internal assessment, there may be an opportunity to buy an additional portfolio in the range of Rs 20,000 crore to Rs 30,000 crore,” SBI said.

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Vinod Kumar, president of SME Forum, said, “There is a certain ripple in the market and the NBFCs are scurrying for cover. They are trying to infuse liquidity by selling the portfolios to tide over the tight liquidity conditions, and banks are trying to build their books, so that they do not have a shortfall in agriculture and other priority sector portfolios.”

Source: DNA Money