COVID-19 Outbreak; Major Challenges Faced by NBFCs & the Access to Possible Solution

Non-Banking Finance Companies are on the verge of commercial debt worth 1.6 Lakh crore and nonconvertible bonds worth 87,000 crores. Especially, Small and medium-sized NBFCs are most at danger due to the recession caused by the Covid-19 pandemic

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Non-Banking Finance Companies are on the verge of commercial debt worth 1.6 Lakh crore and nonconvertible bonds worth 87,000 crores. Especially, Small and medium-sized NBFCs are most at danger due to the recession caused by the Covid-19 pandemic.

According to Mr. Prakash Agarwal, Head of Financial Institutions, India Ratings (Fitch) & Senior Ratings Professional, “NBFC sector has vastly matured over the last decade. The incremental funding could be challenging. The Government needs to understand the NBFCs’ role in the economy”.  NBFC sector got caught up in the contagion effect, making banks and mutual funds (a major source of funding) wary of lending to the shadow lenders, leading to a liquidity crunch in the economy.

Moody’s report said, “The spillover of stress among NBFCs to borrowers, and ultimately to banks, will hinder improvements in banks’ asset quality, profitability, and capital, which is credit negative.”

The government came out with several measures, the most effective one being the Partial Credit Guarantee scheme that is likely to ease the liquidity position of NBFCs. As per sources, the centre has decided to set a target for disbursing at least ₹25,000 crores under the PCG scheme.



Challenges in the NBFC Sector

  1. Funding Issue and Default Refinancing issue

NBFCs have to grip the banks, competitors, or the capital markets for proposing resources every time. Severally, this could be hostile to the sustainability of its growth like in the case of trouble. In addition to that, the flow of funds from these sources could dry up without much notice.

  1. Absence of flexibility in the classification of loan NPAs

Classification under NPA and greater flexibility, w.r.t scheduling is recommended. The classification of NPA norms must be based on the assets financed instead and the borrowers’ profile or uniform system of asset classification.

  1. Dire need of Capacity Building

NBFCs need to strategize creating a receptive ecosystem for capacity building on a both collective and individual basis, which is what NBFCs are lacking these days and need to work on.

Access to Possible Solution

“We need to establish a trust deficit. It’s built on sharing and transparency” said NBFC expert & Infrastructure Financing Evangelist Mr. Suneet Maheshwari.

According to Prof. Anant Narayan, Financial Markets Expert & Ex-banker of SPJMR, “The problem is big; we have to start acknowledging the big problem. There is a possible solution set up, first, acknowledge that if the NPA level as higher as we suspect it could be or fear it could be. We need a onetime solution to this quantum so that it can be resolved separately and the financial sector can start thinking about fresh loans all over again. Our intent and objective are not to keep the financial sector alive, that’s a silly objective to keep. We wanted to come back and start running a marathon! If they have to fund our growth our credit has to grow dramatically and that has to be the final objective. Secondly, let’s face several sectors such as real estate, power sector, MSME, telecom, and so on. Thirdly, sectoral clean up that needs to be done, we all need to clean ourselves for governance to come back. Finally, we need markets to come back; secondary market liquidity is being very lower what we wanted to be. Every regulator is pushing us to go into the capital market. The secondary market liquidity required as well. So four bunches of requirement including Banking reforms, governance reforms, and market reforms are recommended as the solution”.

Still, the NBFCs with potential credit profiles stand a better chance to grapple these issues and challenges, as well as to profit market share from other NBFCs. The RBI has been monitoring the situation and taking steps timely to ease the problems faced by NBFCs. Its latest measures include harmonization of single counterparty exposure limit for banks’ exposure to single NBFCs with a general single counterparty exposure limit.

Under the revised guidelines on large exposure framework that came into effect from April 1, 2019, a bank’s exposure to a single NBFC is restricted to 15 percent of its Tier-I capital, while for entities in the other sectors the limit is 20 percent, which can be extended to 25 percent by the bank’s board under exceptional circumstances.

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COVID-19 Outbreak; Major Challenges Faced by NBFCs & the Access to Possible Solution
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Non-Banking Finance Companies are on the verge of commercial debt worth 1.6 Lakh crore and nonconvertible bonds worth 87,000 crores. Especially, Small and medium-sized NBFCs are most at danger due to the recession caused by the Covid-19 pandemic
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THE POLICY TIMES
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