Tag: nbfc

RBI imposes penalty on 2 co-op banks, 1 NBFC, BFSI News, ET BFSI

Banking & Finance

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Mumbai, Aug 26 (PTI) The Reserve Bank of India (RBI) on Thursday said it has imposed penalties on two co-operative banks and a non-banking financial company (NBFC), for deficiencies in certain regulatory compliance. A penalty of Rs 3 lakh has been imposed on Jijamata Mahila Sahakari Bank, Pune, Maharashtra for non-compliance with the directions on exposure norms and statutory/ other restrictions-urban co-operative banks (UCBs), the central bank said.

In another statement, it said a penalty of Rs 2 lakh has been imposed on The Muslim Co-operative Bank Limited, Pune, for contravention of/non-compliance with the directions issued by the RBI on Know Your Customer (KYC).

The RBI also said it has imposed a penalty of Rs 5 lakh on Seyad Shariat Finance Limited, Tirunelveli (Tamil Nadu), an NBFC, for non-compliance with certain provisions of the Know Your Customer Directions, 2016.

In all the three cases, the RBI said penalities are based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by them with their customers.



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Microfinance institutions look at new ways to boost collections

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Suryoday SFB took the route of funding its customers through its overdraft facility, where the customer is charged only on the amount withdrawn by them from the account.

Banks and non-bank lenders engaged in the microfinance space have started to put in place hybrid models of collections from borrowers in the wake of the second wave of the pandemic. They are trying to use a combination of physical and digital modes of collections in order to avoid disruptions in the process.

Traditionally, repayments in the microfinance segment were made through group meetings as the core borrower base is more comfortable making cash payments. While the loan moratorium precluded the need for collections in the first wave of the pandemic, the collection effort became a major challenge during the second wave in April-May this year.

Harish Prasad, head of banking – India, FIS, said it has been an ongoing process for banks engaged in microfinance to adopt a multi-mode model for collections. “They are now exploring ways of making sure collections can be made through digital channels like UPI when cash collections are not possible,” Prasad said.

Lenders have now begun to team up with fintech players and payment gateway companies to digitise some aspects of the collection process. The aim here is to ensure repayments are not hurt even when group meetings cannot be held or agents cannot go out for collections.

R Baskar Babu, MD & CEO, Suryoday Small Finance Bank, said before the pandemic, such initiatives of behavioural change for customers would have been a time-consuming and challenging affair. “The pandemic has propelled efforts to digitise the collections and there has been some movement, with 3-5% of the customers making payment via digital mode from the full microfinance customer base,” he said. While this is only a small portion of the entire borrower base, the share of digital repayments may improve now that both customers and institutions have seen its benefits, Babu said.

Suryoday SFB took the route of funding its customers through its overdraft facility, where the customer is charged only on the amount withdrawn by them from the account. The bank then sent digital payment links for repayments and saw a fair degree of success through this mode.

A March 2021 report by KPMG and MicroFinance Institutions Network identified Unified Payments Interface (UPI), Aadhaar Pay and National Automated Clearing House (NACH) as channels that could be tapped into for digital collections. “There are mobility solutions available that can be accessed both online and offline for the field staff to post daily transactions (repayment collections) at the field,” the report said.

The first quarter of FY22 was a tough one for microfinance repayments, with the portfolios at risk (PAR) rising across institutions. Brickwork Ratings expects PAR levels to remain around 5.5-6% through the year. “The impact of the pandemic, along with the economic impact of mini state level lockdowns at regular intervals will again hamper the collection cycle, which has not reached pre-Covid levels even after improving in H2FY21,” Brickwork said in a recent report.

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SATYA MicroCapital raises Rs 135 crore through non-convertible debentures, BFSI News, ET BFSI

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Delhi-based SATYA MicroCapital, an RBI registered NBFC-MFI that provides credit access to the underbanked population and micro enterprises, has raised Rs 135 crore through non-convertible debentures (NCDs) from impact investment fund manager responsAbility Investments and Swiss impact investor BlueOrchard Finance.

Blue Orchard invested Rs 55 crore in June and July while Rs 80 crore came from responsAbility Investments recently, SATYA MicroCapital said. The NBFC will utilise the funds to lend to micro and small firms and individuals to help their businesses recover from the pandemic.

Vivek Tiwari, MD, CIO & CEO, SATYA MicroCapital, said, “The pandemic has negatively impacted the small and micro entrepreneurs across the entire nation. Without adequate financial support, it’s a very challenging task for them to come out of pandemic induced roadblocks. Post surpassing the second wave of Covid-19, the immediate requirement is to salvage the businesses and assist them in returning to normalcy. The unbanked population will look to the microfinance sector to help them resume their normal lives.”

He said, “With the help of this funding, SATYA will be able to meet the immediate liquidity demand of businesses which will not only bring their businesses back to life but will also prepare them for a brighter future.” SATYA aims to provide financial assistance to five million households by 2025.

Sanjay Goel, Head – Finance, SATYA MicroCapital Ltd, said, “This is a testament of the belief that our both esteemed debt investors have instilled in SATYA and its operational model.”



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RBI paper, BFSI News, ET BFSI

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The newly created small finance banks (SFB) are serving the intended marginalised and under-served people, and doing so profitably, an analysis by RBI officials has revealed. This category of banks was started in 2017, and a bulk of the entities are microfinance institutions, which converted themselves into lenders, which gave them access to public deposits.

“The SFBs have been provided license with the objective to serve the under-served and marginalised sections of the society…preliminary analysis reveals SFBs to be leading in serving the priority sector,” the paper by Nitin Kumar and Sarita Sharma said.

The study contains an initial assessment of the performance of SFBs for early policy inputs, it said, stressing that its assessment should not be considered as the view of the central bank.

A basic examination reveals a relatively high credit deposit ratio of SFBs and most of them displayed healthy profitability with further improvements in recent quarters, it said.

The study went into operational financials between March 2017 and March 2020 and indicated that bank-level factors like efficiency, leverage, liquidity and banking business are significant in determining SFBs’ profitability during this early period of operation.

It can be noted that the first quarter of the FY22 was a difficult time for many of the SFBs, as the collection efficiencies declined because of the second wave of the pandemic.

Meanwhile, another paper in the RBI bulletin for August on the targeted long term repo operations said that non-bank lenders, which accessed funds through the route, have displayed an improvement in their short-term liquidity buckets compared to others.

As NBFCs were finding their footing after the IL&FS default, the COVID-19 pandemic started a chain of adverse reactions, which exacerbated their liquidity position, the paper by KM Neelima, Nandini Jayakumar, and Jibin Jose said.

The RBI and government swung into action to address the stress through a slew of measures, including the TLTRO scheme that aimed at providing targeted liquidity to sectors and entities, which were experiencing liquidity constraints and restricted market access, it added.

Banks were provided funds at the repo rate and were directed to invest in investment-grade papers of corporates, including NBFCs, it said.

The policy was beneficial in alleviating the liquidity stress faced by the treatment NBFCs in the period following COVID-19 and helped them navigate the tough times, the paper said, adding that this happened at a time when both banks and credit markets were averse to help such entities.

“The empirical exercise undertaken in this article, therefore, suggests that the Reserve Bank’s intervention for easing financial conditions proved to be timely and effective for the NBFC sector,” it noted.



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Microfinance captains expect a turnaround during festive season, BFSI News, ET BFSI

Banking & Finance

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Microfinance loan repayment has risen sharply to about 90% on an average by the end of July from a low of 65-75% in May-June with economic recovery and the number of Covid-19 cases coming down. Industry captains expect business to be back to full swing not before the third quarter as the impact of the second wave is still being felt while the sectoral loan volume shrunk 14% in the April-June period.

“We are expecting recovery around the Durga Puja season. This is the time when business grows. But if the third wave comes, the recovery may be delayed by another quarter,” said Chandra Shekhar Ghosh, managing director at Bandhan Bank, the country’s largest microfinance lender. About 60% of Bandhan’s loan assets are unsecured micro loans.

The largest NBFC-MFI CreditAccess Grameen in terms of loan outstanding said its collection efficiency improved to 91% (excluding arrears payment) in July compared with 81% in June. The same parameter for Ujjivan Small Finance Bank improved to 93% in July from 78% in June. It was 79% as against 70% for Suryoday Small Finance Bank.

Bandhan Bank’s collection efficiency in micro loans was 77% in June.

All microfinance lenders have collectively disbursed Rs 25,820 crore in the June quarter, which was 14% lower than in the March quarter, according to data collated by Sa-Dhan, the oldest microfinance industry association.

Lenders across the board have raised their respective loan provisions in the June quarter to cover the possible future credit risk and took a hit on their profitability.

“We expect business — both in terms of loan disbursement and repayment – to be back to March level (pre-second wave level) by September,” Satin Creditcare Network chairman HP Singh said.

The sector’s gross loan outstanding fell 14% to Rs 2,14,528 crore from Rs 2,49,333 crore three months back.

“We have seen a recovery in microfinance operations since July,” said P Satish, executive director at Sa-Dhan.

A third wave, if it comes, can create further disruptions.

“Just about when we were coming out of the impact of Covid-19, the second wave struck. Though we had higher disbursement during the first quarter of the current fiscal compared to the same period of previous fiscal, business of the sector faced major challenges with full and partial lockdowns. Small MFIs bore the major brunt as access to funds from banks was restrained,” Satish said.



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Sa-Dhan, BFSI News, ET BFSI

Personal Finance

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Mumbai, Aug 16 (PTI) The microfinance industry’s gross loan portfolio (GLP) marginally declined by around 4 per cent to Rs 2,14,528 crore as of June 30 this year, against Rs 2,24,205 crore as of June 20, 2020, according to a report by Sa-Dhan. Sa-Dhan is an RBI recognised self-regulatory organisation for microfinance institutions.

Despite the ongoing pandemic, the sector witnessed disbursement of Rs 25,820 crore by all lenders, though a quarter-on-quarter GLP was down 14 per cent, the quarter 1 report on the microfinance sector released by Sa-Dhan on Monday showed.

As of March 31, 2021, the GLP stood at Rs 2,49,333 crore.

On a year-on-year basis, while banks witnessed around four per cent growth in GLP, small finance banks (SFBs) saw a decline of around 14 per cent.

The highest growth in terms of GLP (y-o-y) belonged to the not-for-profit (NFP) MFIs, which clocked around 15 per cent growth, the report showed.

NBFCs witnessed around a 22 per cent decline in their GLP and NBFC-MFIs saw a dip of around 5 per cent.

“Just about when we were coming out of the impact of COVID-19, the second wave struck. Though we had higher disbursement during Q1 of the current fiscal compared to the same period of previous fiscal, the business of the sector faced major challenges with full and partial lockdowns,” Sa-Dhan’s executive director P Satish said in the report.

Small MFIs bore the major brunt as access to funds from banks was restrained, he said.

However, there has been a recovery in microfinance operations since July, Satish said.

The report said the top five states in terms of GLP are West Bengal, Tamil Nadu, Bihar, Karnataka and Uttar Pradesh.

It said there are 14 states/UTs (Lakshadweep, Kerala, Assam, Andaman & Nicobar Islands, Manipur, Meghalaya, Chhattisgarh, Mizoram, Karnataka, West Bengal, Tamil Nadu, Madhya Pradesh, Pondicherry and Nagaland) with a portfolio at risk (PAR) 30+ value higher than the industry average of 17.16 per cent.

Sa-Dhan has 229 members reaching out to 33 states/UTs and 593 districts. It includes SHG promoting institutions, MFIs (for-profit and not for profit), banks, rating agencies, and capacity building institutions.



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Gold loan business shines as economic stress grows amid pandemic, BFSI News, ET BFSI

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If you have noticed retail shops and restaurants closing down in your locality and brightly lit jeweller’s shop opening in its place off late, there is a business booming in the middle of the pandemic.

While it is not about people flocking to buy gold, but pawning and selling gold in the time of widespread economic distress brought about by Covid.

It’s not just the local jewellers that are expanding, but the organised ones are on growth mode too.

What gives?

RBI data showed that at the end of FY21, the total value of gold loans outstanding was nearly Rs 60,500 crore — up 82% on the year.

Loan demand has picked up from the beginning of July as Covid-19 cases are declining and economic activities are on the upswing with many states easing restrictions. Gold loan non-banking finance companies (NBFCs) said customer walk-ins have increased during the month.

The average ticket size of loans that customers are opting for is Rs 55,000-60,000, which are rising for many lenders, showing growing signs of distress.

Gold loan NBFCs are seeing more competition in the gold loan business in the current financial year as the special allowance given by the Reserve Bank of India to banks to take an LTV (loan-to-value) exposure against gold loan was valid till March 31, 2021. Banks had witnessed a significant growth in gold loan business due to this special allowance. On the contrary, gold loan NBFCs are allowed an LTV exposure of 75%.

Gold auctions

Mannapuram Finance auctioned Rs 404 crore in the fourth quarter, which shot up to Rs 1,500 crore in the June quarter. The auctions happen when borrowers are unable to redeem their gold and the lenders auction it to recover their loans. Mannapuram had auctioned just Rs 8 crore worth of the yellow metal in the first three quarters of FY21.

Manappuram Finance sees business picking up in the second quarter of the fiscal with the gradual unlocking of the economy. It sees a slight decline in the portfolio in the first quarter before the pick-up.

The expansion

Muthoot FinCorp has expanded its physical network by more than 100 new branches, mainly in the north, east and west regions of India, most of which were in rural and semi-urban areas. The NBFC had opened 70 branches in FY20.

Muthoot’s gold asset under management (AUM) grew at a compound annual growth rate of 12% between FY15 and FY20. In FY21, the portfolio grew 27%.

Pune-based Bajaj Finance has increased its gold loan branches from 480 to 700 in the last financial year and plans to add 100 plus branches this fiscal.

Its loan book grew 52% last year to Rs 2,300 crore while it saw an increase in ticket sizes from Rs 75,000 to Rs 85,000 last year.

Bengaluru-based Rupeek Fintech Private Ltd’s disbursals grew 2.5 times during the calendar year 2020. It has added its presence in 17 more cities, from 10 at the end of 2019.

Shriram City Union Finance is also looking to ramp up its gold financing business this financial year, changing its strategy of focusing on other loan portfolios.



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After a lull, NBFCs banking on better times

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Non banking finance companies (NBFC), which had witnessed a drop in disbursements and collections in Q1 (April-June) FY22, expect business to bounce back to the pre-pandemic levels by the end of this fiscal.

While collections have already started improving, disbursements are also expected to gain momentum in the run-up to the festival season, good monsoon and pent-up demand for credit across various sectors.

According to Mahesh Thakkar, Director General of Finance Industry Development Council (FIDC), Q1 of the current fiscal was not very good, but Q2 (July-September) is seeing an improvement. By Q3 (October-December) the industry should bounce back to around 95 per cent of the pre-pandemic levels.

Also read: Public sector banks report sharp slippages in MSME loans in Q1

“Sales are picking up in the auto sector, demand is coming in from MSMEs… the monsoon has been good, and demand is there ahead of the festival season. People have learnt to live with the pandemic and are looking forward to go out. This will give a push to consumption. Spending will improve,” Thakkar told BusinessLine.

Growth in disbursements

Some of the NBFCs expect business to be back to pre-pandemic levels by Q2 of this fiscal.

Shriram City Union Finance (SCUF), for instance, expects disbursements to return to pre-pandemic levels by the second quarter of this fiscal, backed by a steady pick-up in demand across two-wheeler loans, loan against gold, personal loans, and MSME finance.

The NBFC is looking to aggressively push two-wheeler loans, which have witnessed very little delinquency, as well as gold loans. While it also plans to push personal loans and SME loans, however, it would continue to remain cautious and prefer to lend to existing customers, said YS Chakravarti, MD and CEO.

“We normally do disbursements worth ₹6,500-6,600 crore during a quarter. We have disbursed close to ₹2,000 crore in July alone, and we hope to register close to ₹6,000 crore during the second quarter of this fiscal,” he said.

According to Oommen K Mammen, CFO, Muthoot Finance, while disbursements were low in May, by the end of June it started picking up. The company is targeting a 15 per cent growth in assets under management (AUM) this fiscal.

Also read: Microfinance industry bounces back to pre-Covid levels

“In Q2 we are expecting a better business compared to Q1. The restrictions (across various States) are being relaxed, and people have started getting back (to business),” he said, indicating that it will push up the demand for credit. The AUM of the sector grew by a modest 4 per cent in FY21 vis-a-vis six per cent in FY20 (16 per cent in FY19). The housing finance companies (HFCs) grew by about 6 per cent during the last fiscal; within the other NBFC space, retail credit (consisting of vehicle, business loans, personal credit, microfinance) grew by four per cent, while the wholesale credit declined on a year-on-year basis, said a recent report by ICRA.

Overall, the sectoral AUM is expected to grow at 7-9 per cent in FY22, bolstered by the growth in NBFC retail credit and HFCs, which is expected to be about 8-10 per cent, while NBFC wholesale credit growth would remain muted, the report said.

Collections improve

The ICRA report further suggests that the risks for the NBFC sector remain elevated in the near term, and the revival is likely to happen in the next fiscal.

The second wave of Covid9 had a varied impact on the business and operations of NBFCs (private NBFCs, including HFCs). While large HFCs saw relatively limited impact on their collection efficiency (CE), other NBFCs, having exposure to several segments such as vehicle finance, business loans and microfinance, witnessed their CEs decline by about 20-25 per cent in May 2021 vis-a-vis the average Q4 (January-March) FY21 when the lockdown imposed by various States was more stringent and widespread. The CE improved marginally (up by three-to-five per cent) in June 2021 vis-a-vis May 2021 levels, with States steadily relaxing restrictions.

“The impact on CE was lower during Q1 FY22 compared to what was witnessed in Q1 FY21, and initial feedback indicates a further improvement in CE in July 2021. Sustenance of the same in the subsequent months and no further impediments in the revival trends would be crucial from an asset quality perspective. We note that the headline asset quality numbers for June 2021 would be significantly elevated vis-a-vis March 2021, but the same is expected to subside over a couple of quarters if the CEs continue to trend upwards in the subsequent months,” said AM Karthik, Vice President, Financial Sector Ratings, ICRA Ltd.

The restructured book for the NBFCs (excluding HFCs) is expected to move up to 4.1-4.3 per cent by March 2022, while the same for the HFCs is estimated to go up to 2-2.2 per cent. The overall sectoral restructured book is expected to double to 3.1-3.3 per cent by March 2022 vis a vis 1.6 per cent in March 2021.

“Notwithstanding the near-term pressures, the net increase (adjusting for write-offs) in the 90 plus days past due (90+dpd) in the current fiscal is expected to be about 50-100 basis points. ICRA draws comfort from the provisions maintained by the entities, which continue to remain about 100 bps higher than the pre-Covid levels,” Karthik added.

Comfortable liquidity

Liquidity cover at a number of NBFCs has improved from a year ago, putting them in a better position to service debt in the near-term, and cushioning the impact of lower collections because of the second wave, said a CRISIL Ratings study.

Also read: Small businesses hit as banks freeze current a/cs

That is a change from last year when asset-quality and liquidity fears multiplied after a moratorium on repayments and stringent lockdowns affected collections.

Fund-raising through special RBI and government schemes, improving collections in the second half of fiscal 2021, and limited disbursements are some of the factors that supported liquidity.

In the first half of last fiscal, nearly 45 per cent of the funds raised via bonds were through schemes announced following the first wave of the pandemic, such as the targeted long-term repo operations and partial credit guarantee. Even NBFCs that did not have strong parentage managed to raise close to 60 per cent of their incremental bond funding through these routes.

This apart, in the fourth quarter, debt market borrowings also began to rebound. Bond and commercial paper issuances in March 2021 saw the highest on-month rise since January 2020. Even bank funding improved to nearly seven per cent during January-March 2021. With collections picking up and disbursements subdued, liquidity was bolstered.

“Most CRISIL rated NBFCs have built significant on-balance-sheet liquidity. This will allow them to manage the impact of the second wave of the pandemic better than the first. Nevertheless, business challenges linked to the pandemic will continue through most of this fiscal. In this milieu, we expect many NBFCs to continue maintaining strong liquidity cover for debt repayments and operating expenses. That would also help them assuage potential investor/ lender concerns in the near term,” said Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, in the study.

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Amid asset quality woes, FPIs pull out nearly ₹11,000 crore from financials in July

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Foreign portfolio investors (FPIs) have pulled out close to ₹11,000 crore from the financial services sector stocks in July amid concerns over the spike in fresh slippages and asset quality deterioration from the key sector constituents — banks and NBFCs.

According to NSDL data, FPIs pulled out ₹10,767 crore from the financial services sector in July. Of the same, ₹7,341 crore was pulled out from banks while the remaining ₹3,426 crore outflow was from ‘Other financial services’ which includes NBFCs and financial institutions (FIs). The outflow from the financial sector accounts for 95 per cent of the overall FPI outflow during the month across 35 sectors.

“The banking index has been underperforming on concerns of asset quality deterioration. The 6-month Nifty Bank return is only 0.43 per cent while the 6-month Nifty return is 8.8 per cent This under-performance has been largely due to the poor performance of HDFC Bank and Kotak Bank. These two were FIIs’ favourites,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Almost all private and public sector banks have posted good results in the first quarter in terms of earnings, profitability and business growth. However, fresh slippages and elevated levels of non-performing assets still remain a concern for the investors. Take State Bank of India for instance. The country’s largest lender posted its highest ever quarterly net profit at ₹6,504 crore in Q1FY22. However, fresh slippages during the quarter went up to ₹15,666 crore (from ₹3,637 crore in the year-ago quarter). Although, the bank said it was able to claw back Q1 slippages to the tune of ₹4,700 crore in July.

Covid impact

Similarly, major private sector banks including HDFC Bank, ICICI Bank, Axis Bank have all witnessed deterioration in their asset quality in the first quarter due to the impact of the second wave of pandemic.

In its recent report on largest private sector lender HDFC Bank, Emkay Global said, “The bank has managed the first Covid wave well, but the GNPA ratio shot up to a decadal-high of 1.5 per cent in Q1, reflecting accumulated Covid-induced stress in the retail portfolio and the impact of the health scare on collection teams’ mobility.”

The RBI also, in its Financial Stability Report (FSR), said macro stress tests indicate that the gross non-performing asset (GNPA) ratio of scheduled commercial banks may increase from 7.48 per cent in March 2021 to 9.80 per cent by March 2022 under the baseline scenario; and to 11.22 per cent under a severe stress scenario.

Portfolio rejig

Market experts also attribute the FPI outflow from the financial services stocks to the sector’s underperformance and portfolio rejig efforts by the foreign investors.

Motilal Oswal Financial Services’ recent analysis on institutional ownership in Nifty-500 and Nifty-50 companies highlighted that in the Nifty-500 universe, FIIs have the highest ownership in private banks (48 per cent) followed by NBFCs (31.5 per cent), Oil & Gas (22.5 per cent), Insurance (21.6 per cent) among others.

“Financials has had a dominant run over the past few years. However, BFSI’s (private banks, NBFCs, insurance, and PSU banks) underperformance has continued to reflect in the FII allocation – down to 38 per cent in the Nifty-500 as of June, from 45.1 per cent in December 2019 and 40 per cent in March 2020. This has resulted in the trimming of weight by 130 bps q-o-q (quarter-on-quarter),” it added.

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Will RBI take away the punch bowl from IPO financing party?, BFSI News, ET BFSI

Banking & Finance

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Ever thought why the initial public offerings of many companies receive bids that are over 100 times the offer. Apart from the investor appetite and retail frenzy the biggest factor in work is margin financing of IPOs by banks and NBFCs.

July saw several records being broken in the IPO market as a whopping Rs 8.86 lakh crore were bid for IPOs of Rs 18,400 crore on offer. About 98% of the money came from margin financing. Zomato, with an IPO size of Rs 9,375 crore, got bids for Rs 3.58-lakh crore, a subscription of nearly 39 times.

How does it work?

Unlike for retail investors, there is no limit on HNIs and institutions bids in an IPO. HNIs have to put only Rs 1 crore of their own for a bid worth Rs 100 crore while the NBFC funds the remaining 99 per cent. With the lenders charging 10-15%, the cost is just Rs 20 lakh towards interest for Rs 100 crore bid for 3-5 days. With all IPOs listing above the issue price, the leveraged investor can exit on the opening day. With a spectacular listing like the Zomato that gave 63% returns, more players are attracted to the market. The risk of the IPO collapsing in the initial days is virtually absent due to the heavy bidding and grey market premium.

With 15 per cent of an IPO reserved for HNIs and 50 per cent for institutions, their allotment is often enough to cover their interest cost as their bids are extremely high. Self-funding and other sources of borrowing would further increase the size of the IPO financing market.

The fund raise

Bajaj Finance had raised Rs 27,200 crore since June 10, while Infna Finance, Aditya Birla Finance and Tata Capital have collected Rs 13,225 crore, Rs 11,380

crore and Rs 9,625 crore, respectively. Two JM Financial firms have together raised Rs 16,300 crore, while IIFL Facilities Services and IIFL Finance have garnered about Rs 11,600 crore, according to reports. Most non-bank lenders raised funds by issuing commercial papers in the primary market. These papers have tenures of seven to 10 days and yield to maturity between 3.7% and 5.8%.

The risk

Financiers insist the risk is limited since there is a margin for the lender in terms of shares. Normally, higher the funding cost, lower the chances of making money on the IPO after all costs are factored in. Investors need to pay interest on the entire amount borrowed and not on the amount actually allotted. That is why higher oversubscription works against borrowers as they have to have more interest on idle funds.

RBI proposal

The euphoria due to excess funding is leading to artificial demand and distorting IPO prices in the short term. While the funded investors exit on listing, serious investors get low allotments.

In January this year, the Reserve Bank of India had proposed to cap IPO financing by NBFCs to up to Rs 1 crore per person, a move which may lead to a sharp drop in bidding by high net worth individuals (HNIs) and a drastic reduction in subscriptions of offers.

Banks have a Rs 10-lakh limit on IPO financing and there is no such cap for NBFCs. “IPO financing by NBFCs has come under close scrutiny, more for their abuse of the system,” the RBI said in a discussion paper. “Taking into account the unique business model of NBFCs, it is proposed to fix a ceiling of Rs 1 crore per individual for any NBFC,” the RBI said. Market players said that RBI’s proposed rule would surely bring a break to highly subscribed IPOs.



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