Ziraat Times Financial Analysis Desk

In the light of a much-feared widespread default by Non-Banking Financial Companies in India, the Reserve Bank of India (RBI) has come up with a proposal to introduce liquidity buffers for NBFCs that may crimp their ability to lend in the short term and trigger consolidation among weaker non-banks.

The Reserve Bank of India (RBI) on 24 May said it planned to implement liquidity coverage ratio (LCR) in a phased manner over four years starting April 2020. Setting aside 60% of NBFCs’ net cash outflows, as envisaged in the initial phase, in so-called high-quality liquid assets such as government securities and cash will prevent them from deploying these funds for lending.

A possible consequence of the norms is that weaker NBFCs with poor liquidity management will get absorbed into their larger counterparts to comply with RBI’s liquidity buffer norms.

If the financial condition of these non-bank lenders deteriorates, experts worry, it will spark an economic meltdown. However, the government and the banking regulator, which are keenly watching the situation, won’t let that happen, believe experts.

“There is an imminent crisis in the non-banking financial companies (NBFC) sector,” Injeti Srinivas, corporate affairs secretary told the Press Trust of India in an interview on May 12. 

“There is a credit squeeze, over-leveraging, excessive concentration, and massive mismatch between assets and liabilities, coupled with some misadventures by some very large entities, which is a perfect recipe for disaster.”

To be sure, these suggestions are still part of RBI’s draft guidelines and the final one will be prepared after receiving responses from the stakeholders.

Although NBFCs will need to maintain LCR of 60% from April 2020, they will gradually have to move towards 100% LCR by April 2024.

The slowdown, if it happens, could affect overall credit growth since NBFCs play a significant role in the lending market. They have been gradually bolstering their market share in total loans, as banks have turned risk-averse. For instance, NBFCs, which accounted for 13% of the total loans in fiscal year (FY) 2012, now account for 23% in FY19. Consequently, the share of banks has been declining from 87% in FY12 to 77% in FY19, according to data compiled by Emkay Global, a Mumbai-based brokerage.

What is the nature of the crisis in the NBFC sector?

There are concerns today that NBFCs may run out of money, which will lead to defaults. Ever since the IL&FS crisis erupted, banks have been averse to lending to the sector, which has put them in a tight spot.

Amidst all this, there were downgrades by credit rating agencies. For instance, Reliance Capital-owned Reliance Commercial Finance and Reliance Home Finance were downgraded to “default,” implying they faced trouble paying their dues.

Other NBFCs, such as Dewan Housing Finance (DHFL) were downgraded, while PNB Housing Finance was put on credit watch. This has made raising money to fund operations an uphill task for the shadow banks.

Now, what’s worrisome is that in the next three months, about Rs1 lakh crore of commercial papers (CPs) raised by these shadow banks from investors will come up for redemption. CPs are debt instruments issued by companies to raise funds for a time period of up to one year.

The first signs of this crisis were visible in the second half of 2018 when the Mumbai-based Infrastructure Leasing & Financial Services (IL&FS), a three-decade old lending giant, which claims to have helped finance projects worth $25 billion (Rs1.75 lakh crore) across the country, ran out of money. The situation became so dire that it was even compared to the 2008 Lehman Brothers crisis. The government had to step in and supersede the board to avert a blow up. Since then, though, the cracks in the system have only become wider.

With inputs from Nupur Anand, Quartz India

What could happen?

Experts believe the fundamental problem lies in the way these shadow banks function.

They raise short-term loans of between three- and six-months duration, using CPs. On the other hand, the businesses they lend to (home loans, commercial purpose loans, vehicle loans etc.) are long-term ones. This is referred to as asset-liability mismatch.

However, following the IL&FS crisis, neither banks nor mutual fund companies or other investors have been keen on betting their money on these NBFCs. In the meantime, the cost of funds has also increased.

On the other hand, inflows into the mutual fund industry have slowed down, which has a bearing on NBFC funding. “They (mutual fund managers) had a risk aversion towards the (NBFC) sector, but now there is a slow down in debt funds as well. As a result, they are even more cagey about investing in these businesses,” said Karthik Srinivasan, an analyst at credit rating firm ICRA.

As a result, NBFCs face an acute liquidity squeeze, hitting the overall financials of these companies.

Who could get affected?

Experts believe, if there is a full blown crisis, banking sector as a whole and the general public with business with these companies  could get affected.

As of March 31, 2019, banks in India had loan outstanding (money they are yet to collect) of Rs 92.1 lakh crore. In comparison, loans outstanding at shadow banks stood at Rs17.2 lakh crore, a fifth of the banks’.

If there is a default, then banks and mutual funds won’t be able to recover the money lent to NBFCs. The overall market sentiment could be impacted.

For businesses, raising money from NBFCs is comparatively easier than from banks. Therefore, if the shadow banks fail, the funding tap will run dry for individuals and businesses seeking loans.

What has the government and RBI done?

The Narendra Modi-led government has assured the NBFC sector that it will figure out a way to ease the liquidity situation.

Meanwhile, the Reserve Bank of India (RBI) has also been taking steps to improve the funding situation by pumping funds, which can be taken up by the banks to be lent to NBFCs.

The government and the RBI are also looking at a better collection of data from NBFCs. Even credit rating agencies have been asked to include “liquidity” as a separate parameter to stave off another IL&FS-like situation.

“(It) is very dynamic right now and no one knows if it can erupt into full-blown crisis in the coming months,” said Alpesh Mehta, analyst at Motilal Oswal, a domestic brokerage house. 

“One thing is certain, the government and the banking regulator needs to be more proactive and watchful,” he says.

With inputs from Nupur Anand, Quartz India

NBGC Situation in Jammu & Kashmir

Several NBFCs in Jammu & Kashmir have already either gone bust or simply lack business models with sound management and operational expertise. Most of these companies could not manage the highly competitive market interface either. In this emerging situation, the remaining NBFC could be forced to merge with large ones or simply vanish.

Jammu & Kashmir government has been taking several steps to ensure that the state’s potential clients of the NBFCs are secured from the inherent risks of these companies. In this regard the state, has already enacted the Jammu and Kashmir Chit Funds Act, 2016, appointed a nodal officer under the Jammu and Kashmir Protection of Interests of Depositors (in Financial Establishment) Act, 2018, development of SOPs for dealing with public complaints and issuance of notifications under Section 45 T and 58 E of the RBI Act, 1934 and other issues.

However, market experts told Ziraat Times that under the Jammu and Kashmir Protection of Interests of Depositors (in Financial Establishment) Act, 2018; under which an Additional District Magistrate has been made the Competent Authority within their territorial jurisdiction for carrying out enforcement activities under the Act, more needs to be done.

“Although an order to this effect was issued by the State Finance Department on 8th January 2018, information to the general public has not been made readily available. There is a huge deficit of awareness and information on consumer protection in the NBFC domain”, a top banking official of a private bank in J&K told Ziraat Times.

Although there is a State Level Coordination Committee (SLCC) on Non-Banking Financial Companies (NBFCs) and Un-Incorporated Bodies (UIBs), convened by the Reserve Bank of India (RBI), there is a dearth of due analysis of the financial situation and debt health of these companies in J&K, a top J&K government official concedes.

Considering the larger risk exposure of the NBFC in the rest of the country, J&K’s companies, still operational, are likely to face intense stress and even default on their debts.

Is J&K government cognizant of the emerging situation and devising risk mitigation strategies for this? The information received by Ziraat Times suggests that much more needs to be done in this area.

In 2011, the Reserve Bank of India vides letter No. 468/11.01.42/2010-11 dated 11-01-2011, declared that the following Non-Banking Finance Companies (NBFCs) to whom COR have been issued and NOT allowed to accept Public Deposits i.e in Category “B”:

S.No.Name and address of the Company
1The Managing Director,
A.G Finance and Investment Pvt. Ltd.,
23, Mini JDA Complex, Nehru Market Jammu
2The Managing Director
Amar Amba Finance Hire Purchase Private Ltd.,
Bikram Chowk Jammu
3The Managing Director
Aasman Kamraj Leasing & Hire Purchase Company Pvt. Ltd.,
Shop No.11, Palace Road, Jammu.
4The Managing Director
Avtar Securities Pvt Ltd.
Main Bazar Katra, Udhampur
5The Managing Director
Bamba and Compnay Ltd.,
Hall 109, 1st Floor, North Block, Bahu Plaza Jammu.
6The Managing Director
Bir Finance Pvt. Ltd.,
Bhanot House, Kachi Chowni Jammu
7The Managing Director
Chand Fairdeal Financiers Pvt. Ltd.,
1B/B Extension, Gandhi Nagar Jammu.
8The Managing Director
Chaudhary Chhamb Hire Purchase & Finance Pvt. Ltd.,
18 JDA Complex, Nehru Market, Jammu
9The Managing Director
Ess Ess Preet Finance Pvt. Ltd.,
98/1 Railway Road, Nanak Nagar Jammu.
10The Managing Director
Ess Gee Financing Co. Ltd.,
Mani Ram Market, Kanak Mandi, Jammu
11The Managing Director
Green Hill Estate & Finance Pvt. Ltd.,
477 ward No.6 Transport Nagar Jammu.
12The Managing Director
GTZ Securities Ltd.,
77 Kali Jani, Jammu
13The Managing Director
Heewan Finance Ltd.,
Dalwali Gali, Kanak Mandi, Jammu.
14The Managing Director
Humdum Finance Co. Pvt. Ltd.,
Shop No. 109 JDA Complex, Nehru Market Jammu.
15The Managing Director 
Jai Datti Finance & Hire Purchase Pvt. Ltd.,
45 Nehru Market Jammu.
16The Managing Director 
Jammu Ess Iee Finance Pvt. Ltd.,
15/C, A/C Gandhi Nagar Jammu
17The Managing Director
Jammu Financiers Pvt. Ltd.,
313-A, Apsara Road, Gandhi Nagar Jammu.
18The Managing Director
Jammu Sai Holding & Hire Purchase Pvt. Ltd.,
44-D, Nehru Market, Jammu.
19The Managing Director
Jay Kay Transporteres & Financiers Pvt. Ltd.,
407/6, Transport Nagar, Narwal Jammu.
20Jay Kay Credit & Investment Pvt. Ltd.,
1st Floor, North Block Bahu Plaza, Jammu
21The Managing Director
Kar Commercial Pvt. Ltd.,
167 Sector 1, Trikuta Nagar Jammu.
22The Managing Director
Kashind Financiers Ltd.,
Dalwali Gali, Kanak Mandi, Jammu.
23The Managing Director
Kashmir Motor and General Finance Pvt. Ltd.,
40 Ranbir Market Jammu.
24The Managing Director
Kenny Commercials & Investments Pvt. Ltd.,
658-A, Gandhi Nagar Jammu.
25The Managing Director
Kingsway Finance Pvt. Ltd.,
New Market Raghunath Bazar, Jammu.
26The Managing Director
Lily commercial Private Ltd.,
39/1A, 1st Floor, Sector 1A. South Extension, Trikuta Nagar Jammu
27The Managing Director
Mahashakti Financiers  Pvt. Litd.,
Vinayak Bazar, Jewel Chowk Jammu.
28The Managing Director
Makhan Shah Lobana Finance Pvt. Ltd.,
New Nehru Market, Jammu
29The Managing Director
Nagina Hire Purchase Financiers Ltd.,
Shop No.4 Gali Tangawali, kachi Chowni, Jammu
30The Managing Director
New KMS Finance Pvt. Ltd.,
Ramgarh Road, Vijaypur Samba Jammu
31The Managing Director
Regal Finance Company Pvt. Ltd.,
C/o Fair Deal Filing Station, National Highway, Gangyal, Jammu
32The Managing Director
Samridhi Finance Ltd.,
Moti Bazar Jammu
33The Managing Director 
Singari Motor Finance (India) Pvt. Ltd.,
Shop No.1, Gurudwara Market, Bakshi Nagar Jammu
34The Managing Director
Srinagar Holdings Pvt. Ltd.,
127 1st, Floor Upper Bazar, Mohalla Afghana Jammu.
35The Managing Director
Kashmir Finance Pvt. Ltd.,
Bhanot House, Kachi Chowni, jammu
36The Managing Director
The Metropolitan Finance Pvt. Ltd.,
Bhanot House, Kachi Chowni Jammu
37The Managing Director
Treegum Finance & Leasing Ltd.,
187, Central Market, Exhibition Ground Jammu.
38The Managing Director
Univenta Holdings Pvt. Ltd.,
127 Upper Bazar, Mohalla Afghana, Upper Bazar Jammu.
39The Managing Director
V.K Investments & Services Pvt. Ltd.,
47 Shopping Centre, Bakshi Nagar Jammu
40The Managing Director
Venus Star Investment Pvt. Ltd., 
Phase-III Gangyal, Jammu
41The Managing Director
Vishvass Bharat Finance & Investment Pvt. Ltd.,
7, General Bus Stand Jammu.
42The Managing Director
Panjbhakhtar Finance Ltd. 
Hall 109, 2nd Floor, North Block Bahu Plaza Jammu.
43The Managing Director
Jammu & Kashmir Development
Finance Corporation Ltd.,
24-A IInd Exstension, Gandhi Nagar, Jammu.
44Bhanot Finance (P) Ltd.,
Bhanot House, Kachi Chowni Jammu.