A 35-Year-Old Non-Bank Lender Looks To Mergers As A Survival Strategy

India’s non-bank lenders have seen a double whammy of sorts with the crisis brought on first by the collapse of Infrastructure Leasing & Financial Services Ltd. and now by the outbreak of the Covid-19 pandemic. While larger institutions have found it easier to wade through choppy markets, smaller peers are struggling.

SREI Infrastructure Finance Ltd., a 35-year-old NBFC which has seen many ups and downs in its lifecycle, is among those who has seen new business stall and liquidity dry up. The months of April and May were a complete washout, said Sunil Kanoria, vice chairman at SREI. There was a brief respite in June but business slowed again in July following heavy rains and state lockdowns, Kanoria told BloombergQuint over the phone.

The operating environment for NBFCs is difficult, said Kanoria. “NBFCs don’t print money, they depend largely on banks for their funding requirements,” he said. “There’s a struggle for survival and ultimately it will depend on the strategies adopted by different NBFCs and their management.”

This struggle is the reason why SREI Infrastructure is backing mergers of non-bank lenders with banks as a strategy for survival.

“It has happened in the past and there are success stories from such mergers,” Kanoria said. “This will provide a long-term solution to the current liquidity conundrum for NBFCs and will help in expanding the reach of banking services to larger numbers of SME and MSME customers.”

If it receives any proposals for such mergers, SREI Infrastructure Finance will assess them based on merits, he said. In July 2019, SREI Infrastructure Finance had consolidated its lending businesses under its wholly owned subsidiary, SREI Equipment Finance Ltd.. This, the company had said, would make room for conversion into a bank, when the regulator allows it.

In 2013, SREI Infrastructure was one of the 26 applicants for a universal banking license, according to information released by the Reserve Bank of India. However, the regulator gave licenses only to Bandhan Financial Services Ltd. and IDFC Ltd.

In the past, the RBI has allowed mergers between Twentieth Century Finance Corp. Ltd. and Centurion Bank Ltd., as well as between IndusInd Financial Services Ltd., Ashok Leyland Finance Ltd. and IndusInd Bank Ltd. The regulator also allowed Kotak Mahindra Finance Ltd. to convert into a bank in 2003, Kanoria said.

More recently, the RBI approved the merger of Capital First Ltd. with IDFC Bank Ltd. A short while ago, Clix Capital has expressed its interest for a merger with Lakshmi Vilas Bank Ltd. and is conducting its due diligence.

SREI: Hit From All Sides

Business for SREI, which finances infrastructure projects and construction equipment, has been on a slow decline.

As of March 2018, the company’s consolidated advances book stood at Rs 37,884 crore. The loan book fell to Rs 35,222 crore as of March 31, 2020. Total borrowings were at Rs 32,319 crore. It owes banks nearly Rs 18,500 crore, said Kanoria.

The company is yet to report its earnings for the quarter ended June.

According to Kanoria, the infrastructure finance and construction equipment loan portfolio has seen a high proportion of borrowers take the six-month repayment moratorium permitted by the RBI. He declined to disclosed the share of SREI’s loan book under moratorium.

As the moratorium ends, bad loans may rise. As of March 31, SREI Infrastructure reported net non-performing assets of 5.8%.

The RBI has permitted lenders to restructure loans given to Covid-19-hit borrowers. But in another blow to NBFCs, RBI said that the provision would not extend to lending institutions. This means that NBFCs will see their assets come up for restructuring but they cannot restructure their own liabilities.

“The restructuring plan should be made available to all the institutions that require the support in this period of pandemic,” Kanoria said. “The RBI justifiably wants to protect depositors from any possible shock of future defaults. To ensure that, banks can be asked to increase their capital adequacy, general provisions by 5-10% which would provide a cover against the risk of defaults.”

For now, the company is managing its liquidity position by selling its loans in the securitisation market. As part of its asset monetisation process, in FY20, the company securitised loan portfolios worth Rs 3,144 crore, while Rs 950 crore in large ticket loans were sold down. The company is also planning to sell another Rs 200 crore worth loans this year.

However, this is not a sustainable situation, Kanoria said.

Reviewing The NBFC Model

SREI isn’t alone in facing a difficult time. The sector as a whole is likely to see a contraction for the first time in twenty years.

Assets under management for the NBFC industry are expected to shrink 1-3% by March 2021, according to a Crisil report. Barring the top five non-bank lenders, the asset base will contract by a sharper 7-9%.

Kanoria said that there’s a general lack of understanding about the NBFC business model.

“If the business models are different how can you have the same policy for banks and NBFCs on the asset side. And if NBFCs are treated like banks then it makes sense to allow them, at least those which are systemically important, to convert into banks or merge their operations with banks,” he said.

Others in the sector have also pitched for changes in regulations. Larger NBFCs like Bajaj Finance Ltd. have sought more access to public deposits by seeking stronger regulation of the largest NBFCs.

“Frankly, turning an NBFC into a bank is not the best solution for the sector’s problems,” said Suneet K Maheshwari, a managing partner at Udvik Infrastructure Advisors Ltd, an infrastructure financial services firm. “But the regulator can consider a framework where NBFCs can directly sell their assets and gain liquidity, rather than depend on banks and suffer from cherry-picking.”

Unless the regulatory view changes, the divergence in the sector may worsen.

“The NBFC sector is already witnessing some level of consolidation as far as their assets under management are concerned,” said Karthik Srinivasan, group head financial sector ratings at ICRA. “The strong are getting stronger, while the rest are still trying to find funds, despite an easy liquidity scenario.”