Small non-bank financiers prefer cash over new loans

Mumbai: As liquidity becomes constrained in the wake of the covid-19 pandemic, non-bank small and medium-sized financials are slowing new loans extremely, to the point where they are almost reduced to a trickle.

The pandemic has also forced these companies to review their loan portfolios, trying to get rid of wholesale loans in favor of retail loans. This shift was seen even in banks after the last bad debt wave and this time it was the reluctance of banks to fund wholesale non-bank financiers that led to this shift.

For example, companies like IIFL Finance and Edelweiss Financial Services want to completely exit the wholesale lending business within the next two years by selling these assets down.

Nirmal Jain, President and CEO, IIFL Finance said mint in an interview that the non-bank financial corporations (NBFC) sector is reorganizing itself. “Things are not very easy,” Jain said.

According to Jain, while the situation has improved slightly since June, banks are more comfortable lending to retail NBFCs but cautious about smaller ones and those engaged in wholesale lending.

“We are going very cautiously on new loans. We made changes like asking for a higher Cibil score (from 675 previously to 750 now) and also lowered the client leverage ratio threshold, ”Jain said. The company has 12% of its total assets in wholesale loans and the remainder in The size of its real estate ledger is ??3,500 crores.

IIFL Finance has stopped making new wholesale loans and expects the portfolio to shrink over the next two to three years. “We are considering selling these loans but not at an unreasonable price,” Jain said.

Experts have also warned of increased liquidity concerns for NBFCs in the wholesale industry.

“Liquidity stress could be high for wholesale lenders with high exposure to real estate developers, companies without a strong parent company, or companies with perceived weak governance,” S&P Global Ratings said in a June 26 note. .

According to Nachiket Naik, head of corporate loans at Arka Fincap, the mortgage and structured credit activity needs patient capital because the repayment of a large part of these loans is based on eventual withdrawals or refinancing, which is difficult to time, especially in a slowdown.

“Funding such a portfolio through bank indebtedness and capital market debt may not be the most appropriate, because in a downturn in the business cycle it can lead to mismatches. in asset-liability management (ALM), ”said Naik.

Edelweiss Financial Services, another non-bank financier, has given up selling its wholesale loans and is looking to reduce them to zero in two years. The company’s wholesale loan portfolio decreased 28.5% sequentially and 41% year-on-year to reach ??8,393 crore in the March quarter.

“We want to bring it (wholesale loans) down to zero by 2022. We will do that as an asset management company,” Rashesh Shah, chairman and CEO of Edelweiss Financial Services, told analysts, July 6.

Shah said project finance and construction activities were very uncertain about cash flow. “If you do it as a fund, you eliminate the ALM risk and the NPA (non-performing asset) problem,” Shah said.

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