NBFC Sector Remains Fragile, Says Uday Kotak
Non-bank lenders are more fragile than what they were a year ago and have to be closely watched, according to veteran banker Uday Kotak, even as credit crunch triggered by IL&FS defaults has started to ease.
Having seen significant pressure from October and November, “the sector is beginning to breathe a little better now”, Kotak, managing director and chief executive of Kotak Mahindra Bank, said in a letter to the private lender’s employees.
Kotak chairs the board at IL&FS after the government took over the infrastructure group amid fears of a contagion in the credit market. Trust deficit caused by the defaults dried up market funding for non-banking financial services companies. The Reserve Bank, which took several measures to inject liquidity, said in its bi-annual Financial Stability Report that NBFCs continued to remain at risk of failing to meet minimum capital norms should their gross bad loans rise.
The IL&FS default was the first major in that space, raising concerns over the possibility of a Lehman-like mini crisis in the country, Kotak said. And the liquidity crunch that followed was because of higher interest rates as the significant growth in financial savings after demonetisation started to ease with increase in currency in circulation. The first victims of the crunch were NBFCs, he said.
Even apart from the NBFC crisis, the financial sector saw significant turmoil over the past year with 11 public banks continuing to remain under the central bank’s prompt corrective action framework because of weak financial health.
Kotak, however, reaffirmed his belief in the country’s financial sector and the economy in general.
Kotak Mahindra Bank had produced market returns in excess of 20 percent a year even as the index’s returns were barely 3 to 4 percent, he said. But even for a company accustomed to even higher growth rates, there was room for improvement, Kotak said.