SBI Chief Pitches For A Resolution Process For NBFCs

There is a need for a streamlined resolution process for non-bank lenders in India, taking care of multiple regulators’ concerns, according to the head of India’s largest bank.

Different regulators and the multiplicity of the class of creditors is posing a challenge in resolving the stress in the non-bank financial services segment, Rajnish Kumar, chairman of government-controlled State Bank of India, said. He was speaking to BloombergQuint on the sidelines of the annual meetings organised by the World Bank and the International Monetary Fund in Washington DC.

“The resolution framework in case of NBFCs is not clear, like it is in the case of other companies where the insolvency process is there. There has to be a framework which takes care of all the regulatory requirements. That need is being felt,” Kumar said, adding that without it, implementing resolution plans becomes difficult.

The Financial Resolution and Deposit Insurance Bill, which was intended to provide a framework for resolution of financial services firms, was put on the back-burner last year after concerns emerged about a ‘bail-in’ provision for depositors. In the absence of such a framework, banks have been facing a number of practical difficulties in finalising a resolution plan for non-bank lenders.

The challenges between multiple regulators came up recently in the resolution of Dewan Housing Finance Corporation Ltd. where the banks had signed an inter-creditor agreement under existing norms of the Reserve Bank of India. But most mutual funds could not participate because of strict guidelines set by the market regulator.

Appeals To Intervention

Over the past month, State Bank of India has written letters to authorities, including the RBI, requesting help in smoothing over these issues.

In its letter to the RBI, dated September 19, SBI said that the proposed resolution plan for DHFL has been formulated on the principle that “each class of creditors shall be provided equal treatment inter-se such class of creditors and aims to provide at least liquidation value to all creditors for the exposure upon implementation of the Tentative Debt Resolution Plan.” BloombergQuint has seen a copy of the letter.

The resolution plan included a conversion of part of the debt of DHFL into equity. It also included extension of the tenure of a part of the debt. While banks had prepared the resolution plan in accordance with the RBI’s stressed asset framework, mutual funds, insurance companies and pension funds holding debt securities of DHFL are not required to participate in the inter-creditor agreement signed by banks.

In order to implement the resolution plan, SBI sought, “appropriate regulatory measures.” The failure to take these necessary steps could have a negative impact on the flow of bank credit to NBFCs, SBI cautioned in its letter.

The lender went on to add that an inability to settle on a resolution plan will “impact financial stability given the systemic risk and inter-connectedness of the stakeholders and creditors and the degree of the extent of outstanding debt.”

An email was sent to the RBI on Monday seeking a response.

Small and mid-sized non-bank lenders have been facing a liquidity crunch since the surprise defaults by IL&FS group in September last year. Bank credit growth has also slowed as the pace of GDP expansion has fallen to its lowest in six years.

Kumar said a number of steps have been taken by the RBI and the government. Bank lending to NBFCs has grown by more than Rs 40,000 crore in this financial year was a welcome sign of this, he said. “It is hoped that much of this will be used for on-lending.”

“The slowdown in bank credit growth will reverse itself in the coming months, as we go through the festive season, which is typically when demand is higher,” he said.

Watch | SBI’s Chief Rajnish Kumar on outlook for India growth story.