'NBFCs unsure of getting bank licence even if they apply'

Srei Infrastructure Finance chairman says Section 29A of Insolvency and Bankruptcy Code should be withdrawn as not all promoters are frauds

December 09, 2018 10:04 pm | Updated 10:08 pm IST

Hemant Kanoria, chairman and managing director of Srei Infrastructure Finance Ltd., explains why NBFCs are not applying for banking licence even after the process is in ‘on-tap’ now.

The Reserve Bank of India (RBI) appears to have nixed hopes of any special liquidity window for non-banking finance companies (NBFCs). Do you agree with the central bank’s assessment of the liquidity situation?

As I understand, none of the NBFCs is experiencing strain in its liquidity position, so I do not see any immediate need for special liquidity support by the RBI or the government. However, the expanding and deepening of the liability side of NBFCs’ balance sheets should be the focus, so that their business is not constrained.

Currently NBFCs are allowed to raise money from banks, mutual funds, through bonds, and via external commercial borrowings (ECB). If NBFCs are allowed to raise public deposits like banks, then they will be able to manage their liabilities more efficiently through a varied product mix. Also, the larger NBFCs should be given an option to convert themselves into banks. That will help them manage the liability side of their balance sheet better.

RBI has issued guidelines for ‘on-tap’ bank licensing in August 2016. Why are NBFCs not applying for banking licence?

It is probably because the NBFCs are not sure whether they will be allowed to become a bank even if they apply. Also it is difficult to predict how long it will take to secure approvals. It will be better if the RBI introduces certain guidelines stipulating the net worth, portfolio size, governance structure, etc. on the basis of which large NBFCs will be allowed to convert themselves into banks. Right now, NBFCs are undecided. So, if there is a clarity, it will be easier for NBFCs to take decisions.

Can NBFCs survive on their own considering their dependency on banks for resource mobilisation?

In an ideal situation, NBFCs should not be relying only on banks for raising resources. To reduce the dependency on banks NBFCs should be allowed to access resources through multiple avenues. NBFCs should be allowed to issue bonds on a continuous basis.

Currently, every time an NBFC plans to raise money through bonds, it has to secure multiple approvals. The paraphernalia that is required for issuance of bonds should be eased so that NBFCs can mobilise resources through this route on an ‘on-tap’ basis. In spite of certain recent relaxations, there are still restrictions on NBFCs on ECBs. This route should be streamlined further, so that NBFCs can access the overseas market for their funding requirements.

Was it difficult for Srei to raise funds in last two-three months?

We have never borrowed short and lent long. For the last 30 years, we have never compromised on that policy and managed our cash flows very well. That is why we have not faced any liquidity issues. In terms of business growth, while there has been growth it could have been better. We are being cautious in our disbursements till the time there is uncertainty in the market.

What has been the loan growth so far this financial year and what is your target for the full year?

Our equipment financing business has seen strong growth. On a consolidated basis, Srei’s disbursements have grown by 13% year-on-year to ₹11,763 crore in the first six months of this financial year. The consolidated assets under management (AUM) were at ₹50,893 crore as on September 30, 2018, up 14% from a year ago.

Initially, we were targeting a growth of 20-25% in our portfolio for the full year. While the growth has been good in the first two quarters, it has been tepid in the third quarter. We will have to see how things pan out in the fourth quarter.

Have you seen rates harden in last three months? Has that impacted your cost of funds?

Yes, interest rates have been hardening in the last few months. Our borrowing costs and lending costs are always matched. So if there is an increase in our borrowing costs, our lending rates are also increased.

Almost all our loan products are on floating rates.

What is your opinion on the Insolvency and Bankruptcy Code (IBC)?

The intent has been good. Unfortunately, because of the amendments, especially with the introduction of Section 29A, it has become a riddle. For instance, if one is expelling a promoter from his company which has failed due to circumstances beyond his control, then he will resist it and the bank/institution will be engaged in long-drawn litigations. If there is fraud then the promoter should be punished, but if it is due to the environment or some other external factors then he should be allowed a chance to own back the company. So, in my opinion, Section 29A of IBC should be withdrawn.

Today, if a business fails then we are quick to hang the entrepreneur. If this continues, we will kill enterprises and entrepreneurial spirit in our country. No one will be willing to start a business and job creators will turn into job seekers. In such a situation, the government will have to provide employment for everyone, like it used to happen in the erstwhile USSR.

We must accept that businesses can fail. At present, failure is criminalised. We must review all our Acts, regulations and guidelines and make an effort to decriminalise business failures. Otherwise this will turn into a huge crisis for our country.

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