Over A Third Of NBFC Loanbook Under Moratorium, Says Edelweiss’ Rashesh Shah
India’s non-bank lenders are navigating liquidity challenges once again with more than a third of their loan books under the three-month moratorium offered by the Reserve Bank, according to Edelweiss Group’s Rashesh Shah.
“For us and for most NBFCs, about 35-38 percent of the customers have availed of moratorium,” Shah, chairman of the diversified group, told BloombergQuint in an interview. “For the last 18 months, NBFCs have been squeezed for liquidity. Ironically, when we entered January 2020, I felt that liquidity had now been managed. And then Covid-19 happened.”
Non-banking financial companies have been coping with a liquidity crisis ever since the collapse of the IL&FS Group in 2018. And with the Covid-19 pandemic amplifying the economic slowdown, NBFCs are expected to face liquidity and solvency strains again. Moody’s Investors Services expects the moratorium to eventually weaken asset quality and add to liquidity stress.
Just when you feel it is safe to go back in the water, the shark comes along again.Rashesh Shah, Chairman, Edelweiss Group
April has been extremely challenging for NBFCs from a liquidity perspective, Shah said. That was particularly because for NBFCs, the moratorium was a one-way ride. While they had to offer moratoriums to their own customers, they themselves did not receive similar relief on repayments from banks—sparking concerns of asset-liability and cash-flow mismatches. India’s largest lender State Bank of India changed its position earlier this month and other banks followed suit.
Still, Shah said that non-bank lenders are continuing to repay their loans as scheduled. “Most NBFCs have decided not to ask for a moratorium from banks and instead ask for fresh loans. Because fresh funding can come on new terms and with a lot of specificity as to what you need,” Shah said. “So all banks are saying pay your old dues as they are, don’t ask for moratorium but ask for a fresh loan instead.”
For Edelweiss, Shah said he expects the company to pay back Rs 4,000 crore to banks as part of its normal repayment scheduled. And their ask is that they get these funds back as long-term repo operation bonds, a loan or some other form so that they can maintain their liquidity reserves.
We don’t want the reserves to get over. The way it is working is that first you repay banks from your reserves and the fresh funding will help replenish the reserves.Rashesh Shah, Chairman, Edelweiss Group
Shah said Edelweiss, at any point, maintains at least Rs 6,000-8,000 crore of liquidity reserves. Over the last 18 months, the company has kept between 14-20 percent of their borrowings as liquidity reserves, he said. That would be around 1.5-2.5 times their three-month repayments, Shah said. “We have been aiming for at least 2 times the three-month repayment as liquidity reserve.”
He said banks have seen that most NBFCs have reserves that will last at least till the end of July.
Watch | Rashesh Shah On Coronavirus’ Impact On NBFCs
‘Step-Motherly Treatment For NBFCs’
Despite the government’s initiatives for the NBFC sector, Shah said that he believes non-bank lenders have been treated somewhat unfairly.
“I think in the last 18 months, NBFCs have felt that the entire approach towards them has been step-motherly,” Shah said. “Increasingly NBFCs have been curtailed in what they can do and cannot do.”
His comments stem from the fact that RBI does not offer a direct backstop for NBFCs even though banks can tap the central bank directly for liquidity needs.
“The problem NBFCs are grappling with is asset liability mismatch, when suddenly the commercial paper market closed down, the debt market closed down then the bank moratorium issue has come about,” Shah said. “All this creates a lot of asset liability mismatch risk.”
Shah said that in the credit business asset-liability mismatch risk is inevitable. “Someone in the system needs to take the ALM risk,” he said. “Banks can take it because they have the RBI backstop. But in the last 18 months we said NBFCs cannot take it, now we say mutual funds cannot take it, then who will take that risk?”
Edelweiss also expects some amount of increase in stress and credit costs. However, since the company does not have a significant retail portfolio, it expects the risks to limited. “For us, incrementally, we do not expect much impact. Our credit costs will go up. It was at 2 percent and then we had upped it to 4-4.5 percent of the book. It will now go to 5 percent.”
For the industry though, retail loans will see some stress in the near-to-medium term. “Long term, collateralised loans will not see much of an impact. Short term unsecured loans will see a lot of impact.”