Tag: nbfc

Credit costs to remain elevated for NBFCs: CARE Ratings

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Credit rating agency CARE Ratings expects credit costs to remain elevated for non-banking finance companies (NBFCs) in FY22 amid the second wave of Covid-19 pandemic.

For FY22, CARE Ratings expects a level of stress, especially in the loan portfolio under restructuring and those which were under moratorium, the impact is likely to be visible in the next one year.

“As such, delinquencies are estimated to rise moderately,” according to a report by the credit rating agency.

The agency observed that NBFCs have been grappling with a succession of uncertain events since 2016 — demonetisation, Goods and Service Tax (GST) implementation, liquidity crisis in 2018 and Covid-19 pandemic in 2020.

These uncertain events derailed growth, disrupted collections and increased loan loss provisioning across asset classes.

Financial metrics

“From Q4 (January-March) FY20, credit costs across major NBFC sub-segments reported substantial increase and has remained at elevated levels. This affected the financial metrics for H1 (April-September) FY21 negatively,” the report said.

Also read: FIDC seeks relief measures in wake of second Covid wave

The agency assessed that after September 2020, the economy re-opened with signs of revival which led to improvement in the sector, collections inched closer to pre-Covid levels and growth gathered momentum. But the second wave of Covid-19 has pulled back the recovery gains with subsequent impact on asset quality.

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NBFCs ask RBI for extended recast scheme, more liquidity support

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“While the existing allocation for other sectors may continue at their prescribed limits, the additional Rs. 25,000 crore may be made available exclusively to medium and small NBFCs, through SIDBI for period of three years,” FIDC said.

As the impact of the latest wave of Covid infections starts to play out, non-banking financial companies (NBFCs) have asked the central bank to allow a fresh round of loan restructuring for businesses and consumers undergoing stress. In a letter to the Reserve Bank of India (RBI), industry association Finance Industry Development Council (FIDC) has also sought liquidity support for on-lending to small businesses.

“It is feared that this second wave of Covid will peak sometimes in May and then possibly start climbing down in June. It will not be long before the NBFC industry starts reeling under pressure of increased NPAs (non-performing assets) and at the same time, handling demand of moratorium and/or restructuring from its existing and deserving customers,” FIDC said in its representation. It explained that a large number of borrowers in the NBFC segment are truck or taxi owners/drivers, machine operators, marginal farmers, small shopkeepers, stockists, local contractors and workshop owners. These categories of professionals are being hit by localised and state-wide lockdowns mandated in parts of the country, FIDC said.

The industry has requested that borrower accounts be allowed to undergo restructuring without any downgrade in asset classification, irrespective of whether they had been restructured on any earlier occasion as long as they were standard accounts as on March 31, 2021. It also suggested that the RBI could look to prescribe broad parameters for credit assessment of such accounts on the lines of recommendations made by the KV Kamath committee. This would help standardise the approach followed by lenders. They have also sought a standstill on asset classification of restructured accounts in Q1FY22.

The other requests are to ask banks and financial institutions to allow a one-time restructuring of loans given by them to NBFCs with a total asset size of under Rs 500 crore, and to increase the overall support outlay to all India financial institutions (AIFIs) to at least Rs 75,000 crore from Rs 50,000 crore. “While the existing allocation for other sectors may continue at their prescribed limits, the additional Rs. 25,000 crore may be made available exclusively to medium and small NBFCs, through SIDBI for period of three years,” FIDC said.

Lockdowns and other restrictions on mobility have already begun to hurt NBFCs’ collections. The microfinance sector’s collection efficiency has stalled at 90-94% in the past few months compared with the pre-pandemic level of 98-99%, Crisil Ratings said in a report earlier this month. Lenders are also likely to turn cautious again as during the first wave, particularly in the personal loan and business loan segments, analysts said. “As far as the SME business is concerned, it remains lackluster as lenders are shying away from new customers, while existing customers have already been extended the ECLGS (emergency credit line guarantee scheme) benefit, leaving no further scope to lend to existing customers,” Emkay Global Financial Services said in a recent report.

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FIDC seeks relief measures in wake of second Covid wave

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Concerned about the impact of the second wave of Covid-19 infections, Finance Industry Development Council has sought relief measures including restructuring for retail and individual borrowers of non banking financial companies (NBFCs).

In a representation to Reserve Bank of India Governor Shaktikanta Das, FIDC has asked that borrower accounts, irrespective of whether or not they had been restructured earlier and if they are standard accounts as on March 31, 2021, may be allowed restructuring without any downgrade in asset classification, subject however to the lending NBFCs undertaking fresh credit assessment of the borrowing entity.

“We wish to bring to your kind notice that the second wave of Covid- 19 has already started impacting the industry, more so the above self- employed segment of customers having little or nothing to fall back upon,” FIDC said in the letter.

NBFCs under pressure

It also pointed out that with many states like Maharashtra, Chhattisgarh, Madhya Pradesh, Karnataka, Rajasthan, Tamil Nadu and NCR already under lockdown or lockdown-like strict conditions, which has resulted in closure of NBFC branches. It is becoming increasingly difficult to reach customers for collections as their business has come to standstill and their livelihoods are under threat, it further said.

“It will not be long before the NBFC industry starts reeling under pressure of increased NPAs and at the same time, handling demand of moratorium and/or restructuring from its existing and deserving customers,” FIDC said.

Loan restructuring

It has also asked the RBI to allow standstill on buckets for restructured accounts for the first quarter of the current fiscal.

FIDC has also sought restructuring of loans taken by small NBFCs (having asset size of less than ₹500 crore) from banks and FIs and to avoid ALM mismatch arising out of restructuring of their customers’ accounts.

It has also asked the RBI for liquidity support to small NBFCs for on lending to micro, small and medium enterprises.

“We urge the RBI to increase the overall support outlay to AIFIs from ₹50,000 crore to at least ₹75,000 crore,” FIDC said, adding that benefit of PSL classification for lending by banks to

NBFCs for on-lending may please be regularised as part of the overall PSL policy.

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RBI guidelines require banks, UCBs and NBFCs to appoint auditors for 3 years

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The Reserve Bank of India (RBI) on Tuesday issued guidelines for appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) in commercial banks, urban co-operative banks and non-banking finance companies from FY22 onwards, whereby they will have to appoint SCAs/SAs for a continuous period of three years.

RBI guidelines regarding appointment of SCAs/SAs will be implemented for the first time for urban co-operative banks (UCBs) and non-banking finance companies/NBFCs (including housing finance companies) from FY 2021-22.

However, UCBs and NBFCs will have the flexibility to adopt these guidelines from H2 (second half) of FY 2021-22 in order to ensure that there is no disruption.

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Non-deposit taking NBFCs with asset size (total assets) below ₹1,000 crore have the option to continue with their extant procedure.

Commercial banks (excluding Regional Rural Banks/RRBs) and UCBs will be required to take prior approval of RBI (Department of Supervision) for appointment/reappointment of SCAs/SAs on an annual basis.

RBI tightens internal audit framework for NBFCs, UCBs

While NBFCs do not have to take prior approval of RBI for appointment of SCAs/SAs, all NBFCs need to inform RBI about the appointment for each year.

For entities (commercial banks. UCBs, and NBFCs) with asset size of ₹15,000 crore and above as at the end of previous year, the statutory audit has to be conducted under joint audit of a minimum of two audit firms [Partnership firms/Limited Liability Partnerships/LLPs].

All other entities have to appoint a minimum of one audit firm (Partnership firm/LLPs) for conducting statutory audit.

Entities need to ensure that joint auditors do not have any common partners and they are not under the same network of audit firms.

Asset size and numbers

The RBI said the entities should decide on the number of SCAs/SAs based on a board/local management committee (LMC) approved policy by taking into account factors such as the size and spread of assets, accounting and administrative units, complexity of transactions, level of computerisation, availability of other independent audit inputs, identified risks in financial reporting, etc.

The central bank prescribed that an entity with an asset size up to of ₹5 lakh crore can have a maximum of 4 SCAs/SAs; above ₹5 lakh crore and up to ₹10 lakh crore: maximum of 6 SCAs/SAs; above ₹10 lakh crore and up to ₹20 lakh crore: 8 SCAs/SAs and above ₹20 lakh crore: 12 SCAs/SAs.

In case of any concern with the management of the entities, such as non-availability of information/non-cooperation by the management, which may hamper the audit process, the SCAs/SAs are required to approach the Board/Audit Committee of the Board/Local Management Committee of the entity, under intimation to the concerned Senior Supervisory Manager (SSM)/Regional Office (RO) of RBI.

Concurrent auditors of the entity should not be considered for appointment as SCAs/SAs of the same entity.

The central bank emphasised that the audit of the entity and any entity with large exposure to the entity for the same reference year should also be explicitly factored in while assessing independence of the auditor.

Tenure and rotation

In order to protect the independence of the auditors/audit firms, the RBI said that entities will have to appoint the SCAs/SAs for a continuous period of three years, subject to the firms satisfying the eligibility norms each year.

Further, commercial banks (excluding RRBs) and UCBs can remove the audit firms during the three-year period only with the prior approval of the concerned office of RBI (Department of Supervision), as applicable for prior approval for appointment.

NBFCs removing the SCAs/SAs before completion of three years’ tenure have to inform the concerned SSM/RO at RBI about it, along with reasons/justification for the same, within a month of such a decision being taken.

An audit firm would not be eligible for reappointment in the same entity for six years (two tenures) after completion of full or part of one term of the audit tenure. However, audit firms can continue to undertake statutory audit of other entities.

The RBI said one audit firm can concurrently take up statutory audit of a maximum of four commercial banks [including not more than one PSB or one All India Financial Institution (Nabard, SIDBI, NHB, Exim Bank) or RBI], eight UCBs and eight NBFCs during a particular year.

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Agi-focussed NAFA raises $40 m via ECB

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Netafim Agricultural Financing Agency Private Ltd (NAFA), an agri-focused non-banking finance company and subsidiary of Netafim Singapore, has raised $40 million via external commercial borrowing (ECB) from the Phoenix Group and Cogito Capital, both Israel-based investors.

The NBFC recently also raised $9.4 million of Tier I Capital from Netafim Singapore and offering exit to the initial equity partners, Atmaram Properties & Granite Hill Fund, as they had reached their investment horizon, as per its statement.

Business expansion

The ECB funds will be utilised for business expansion, enhanced offerings, and to expand horizons in the agri-rural domain, it added

NAFA observed that the ECB fund-raise will improve its margins as it intends to service the high-cost old debt and bring down the overall cost of funds.

This is the maiden investment for both Phoenix Group and Cogito Capital in India and NAFA, through acquiring stake in Netafim Singapore, the statement said.

Agriculture needs holistic solutions

Since acquiring an NBFC licence from the RBI in 2013, NAFA has established its presence across Maharashtra, Madhya Pradesh, Chhattisgarh, Gujarat, Tamil Nadu, Karnataka and Andhra Pradesh.

According to NAFA, it has disbursed total loans worth over ₹1,000 crore to more than 10,000 customers as of date. Among these, more than 60 per cent of the farmers are small farmers and marginal farmers.

The company said it will expand its network and diversify to allied activities for customers’ long-term credit needs.

Lauri A Hanover, CFO, Netafim, said: “In the aftermath of Covid, India is gearing up for self-reliance with emphasis on the agri-rural economy and its rapid modernisation.

“The equity infusion in NAFA is aligned with our core of supporting customers in adopting precision irrigation and automation solutions in agriculture. This equity infusion will help NAFA strengthen its capital adequacy and further expand its market presence.”

Prabhat Chaturvedi, CEO, NAFA, observed that there is a need for diversified credit schemes in India, along with adequate handholding, to provide financial guidance to farmers on investing in agriculture and allied activities.

“With this investment, NAFA will further enhance its credit lending portfolio and expand horizons within the agri-rural domain beyond micro-irrigation…The said capital would help us strengthen our market position and reach the communities in a much broader way,” said Chaturvedi.

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HDFC-Indiabulls Housing co-lending partnership: Is it a prelude to something bigger?

Banking & Finance

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Is the co-lending partnership between Housing Development Finance Corporation Ltd (HDFC) and Indiabulls Housing Finance Ltd (IBHFL) a prelude to something bigger?

Currently, the Reserve Bank of India (RBI) only has guidelines for co-lending by banks and non-banking finance companies (NBFCs) for lending to the priority sector.

There are no specific RBI guidelines governing co-lending by two NBFCs (including housing finance companies/ HFCs).

 

So, the co-lending partnership between HDFC, India’s largest standalone HFC, and IBHFL, whose loan book shrunk in the second and third quarters of FY21, comes as a surprise.

In terms of RBI’s “Co-Lending Model”(CLM), banks are permitted to co-lend with all registered NBFCs (including HFCs) based on a prior agreement.

Under this model, NBFCs are required to retain a minimum of 20 per cent share of the individual loans originated by them on their books, with the partner banks taking their share on a back-to-back basis in their books.

As per RBI guidelines, CLM is aimed at improving the flow of credit to the unserved and underserved sector of the economy and make available funds to the ultimate beneficiary at an affordable cost, considering the lower cost of funds from banks and greater reach of the NBFCs.

HDFC, in a statement, said the objective of the co-lending program is to increase its distribution bandwidth, which will lead to additional retail housing loan business.

Under the co-lending programme, IBHFL will originate and process retail home loans as per jointly formulated credit parameters and eligibility criteria. The Corporation will have 80 per cent of the total loan in its books. IBHFL will service the loan account throughout the life cycle of the loan

So, once the co-lending partnership matures, what could be the next logical step? Is this partnership a smoke signal on a possible amalgamation down the line? Only time will tell.

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Bank, NBFC loan collections drop up to 10% as Covid intensifies, BFSI News, ET BFSI

Banking & Finance

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April took a sudden turn for banks moving towards normalcy.

Bank, NBFC loan collections drop up to 10% as Covid intensifies

Bank and non-banking finance companies saw a drop in loan collections from the first fortnight of this month.

Collections dropped 5 per cent to 10 per cent as lockdowns hit businesses.

Banks are now going slow on disbursals too sensing troubled times ahead.

The worst affected have been the micro and small enterprises, micro-finance and the commercial vehicles (CV) segments where collection efficiencies dropped rapidly.

Weak business activity

As per a report by Emkay Global, the first fortnight of April 2021 has been weak in terms of business activity which is down by 20% across various segments due to lower working days and onset of an aggressive second wave of Covid-19 infections. This is expected to fall further with far stricter enforcement of localised lockdowns.

The collection efficiencies were improving from August-September onwards on a month-on-month basis across asset classes. However, a year back, the restrictions announced so far are lower in trajectory or intensity. So while there will be an impact on collections and delinquencies, the impact should be lower than what we saw in Q1 of last year.

Bank, NBFC loan collections drop up to 10% as Covid intensifies
Bank, NBFC loan collections drop up to 10% as Covid intensifies

But if there was a rise in the intensity of cases accompanied by containment measures and restrictions, it could further impact collections.

In the case of NBFCs, gold loan and home loan NBFCs will be least impacted whereas unsecured loans, MSME loans and wholesale loans will be more impacted given the vulnerability of the underlying borrower class.

The spread intensity and duration of the pandemic, how long the lockdown and curbs last and vaccine trajectory will decide the severity of hit to banks.

The customer cash flows

The salaried class includes a large segment of IT professionals whose salary levels and jobs have not been impacted, though their discretionary expenditure has come down.

However, a bulk of the salaried class is facing pay cuts and job losses while among the self-employed, those in the essential segment like agrochemicals, pharmaceuticals, have not seen much impact but others have faced a drop in cash flows.

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DCB Bank acquires minority stake in Techfino Capital

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DCB Bank Limited, a private sector bank, has acquired a minority equity stake of about 9 per cent in Bengaluru-based non-banking financial company (NBFC), Techfino Capital Private Limited (TCPL).

The funds raised by TCPL will be used in enhancement of current tech stack apart from on-lending to customers. Techfino provides customised consumer loans in education and healthcare sectors. It is present in key metros and tier II cities across India.

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Complementing strengths

Narendranath Mishra, Head, Agri and Inclusive Banking, DCB Bank, said, “DCB Bank and TCPL are delighted to be associated in this manner. Micro loans or granular loans as a financial solution hold much promise. We value each other’s experience and expertise to build a granular loan portfolio with patience and nuance. DCB Bank and Techfino complement each other’s strengths, and this is an opportunity for both organisations to grow the customer franchise.”

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Jayaprakash Patra, Co-Founder Director, Techfino Capital Private Limited, added, “The association with DCB Bank is an important milestone. It shall help in the growth of the business as TCPL goes about providing financing solutions to its customers. Together, we aim to create a win-win ecosystem, offering our customers a bouquet of customised financial solutions using TCPL’s robust technology platform.”

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DCB Bank acquires 9% stake in Techfino Capital, BFSI News, ET BFSI

Banking & Finance

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DCB Bank, announced that it has purchased a minority equity stake in Techfino Capital Private Limited worth approximately 9%. (TCPL). Techfino, a non-banking financial company (NBFC) headquartered in Bengaluru offers customised consumer loans in the education and healthcare sectors through its technology platform.

DCB Bank serves diverse business segments comprising retail, micro-SME, SME, mid-Corporate, Agriculture, Commodities, Government, Public Sector, Indian Banks, Co-operative Banks, and Non-Banking Finance Companies (NBFC).

Narendranath Mishra, Head Agri and Inclusive Banking, DCB Bank, said, “DCB Bank and TCPL are thrilled to work together. As a financial solution, micro or granular loans hold a lot of promise. To build a granular loan portfolio with patience and nuance, we respect each other’s experience and expertise. The strengths of DCB Bank and Techfino complement each other, and this is an opportunity for both companies to expand their consumer franchise.”

Jayaprakash Patra, Co-Founder Director, Techfino Capital Private Limited, said, “The association with DCB Bank is an important milestone. Using TCPL’s comprehensive technology platform, we hope to build a win-win environment by providing our customers with a variety of customised financial solutions. The funds raised will be used in enhancement of the current tech stack apart from on-lending to customers.”



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Why HDFC deposits are a safe option for senior citizens

Personal Finance

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The prevailing low interest rates on deposits have been pinching senior citizens the most. Seniors who are more keen on capital conservation than higher interest rates can consider the deposits from HDFC. Currently, HDFC offers seniors 6.1 per cent interest for 24-month deposits

Depositors who wish to get regular payouts can opt for the non-cumulative option, with monthly/quarterly/half yearly or annual payouts. Those who don’t need regular payouts, can instead opt for the cumulative option which offers annual compounding.

The minimum amount that can be deposited with HDFC for a fixed deposit is ₹20,000.

While the deposits of HDFC, an NBFC, are not covered by deposit insurance (bank deposits of up to ₹5 lakh are covered by DICGC), its 40-year plus stable business provides significant confidence. Besides, the company has been maintaining a AAA rating on its deposits for more than 26 years.

How they fare

As interest rates have almost bottomed out, they are likely to inch up in the next two to three years. Hence, at the current juncture, it is wise to lock into deposits with a tenure of one or two years.

For such tenures, HDFC offers seniors better interest rates than those offered by prominent banks such as SBI (up to 5.6 per cent), HDFC Bank (up to 5.4 per cent), ICICI Bank (up to 5.5 per cent) and Axis Bank (up to 6.05 per cent), which are considered safest options among banks.

Other private sector banks and small finance banks, however, offer even higher rates (up to 7.5 per cent) for one to two year deposits. The recent debacles at YES Bank and other co-operative banks have stoked fear in the minds of depositors. Given that, seniors may prefer safety of capital over the lure of higher rates.

HDFC also offers better rates compared to corporate FDs with similar ratings from other NBFCs such as LIC Housing Finance, that offers up to 5.9 per cent for a tenure of up to 2 years.

About HDFC

Incorporated in 1977, HDFC, a housing finance company currently offers loans to individuals (comprising 76 per cent of the loan book) and corporates (6 per cent). HDFC also lends for construction finance (11 per cent) and lease rental discounting (7 per cent).

With an outstanding loan book of ₹,52,167 crore as of December 2020, HDFC is India’s largest housing finance company. HDFC’s non-performing assets (proforma) are contained at less than 2 per cent. In addition to that, the company’s provisions (cumulative including those related to covid) cover up to 2.56 per cent of the loan book exposure.

As at the end of December 31, 2020, HDFC’s capital adequacy ratio stood at 20.9 per cent, well above the regulatory requirement of just 14 per cent.

HDFC also has several financial subsidiaries –prominent ones among them are HDFC Bank, HDFC Asset Management Company, HDFC Life Insurance, HDFC Credila and HDFC Ergo. Its consolidated profits at the end of the first nine months of FY21 stood at ₹1,33,900 crore.

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