Rough Times for NBFCs in India
Around August 2018, it was as if a tsunami hit the world of Non-banking finance companies (NBFCs) in India. For the last 4 to 5 months, they have gone through a rough phase which was triggered by a sudden default on its short term debt obligations by a blue chip AAA rated infrastructure lending NBFC, viz. Infrastructure Leasing and Financial Services (IL&FS).
Debt-ridden IL&FS, which various corporates as well as mutual funds and insurance firms had invested through short-term instruments like commercial papers and non-convertible debentures (NCDs), has been serially defaulting on its several debt-obligations since August. IL&FS’ borrowings from banks and financial institutions added up to nearly Rs 63,000 crore (c. $9 billion) as per the balance sheet of FY 2017-2018. There were concerns that many NBFCs could have their funds stuck in IL&FS debt instruments given its AAA pedigree. The NBFC has since been taken over by the Government of India which has appointed a Board of professionals to bring it on even keel.
Solutions and Consequences
Banks are the major resource avenue for NBFCs. After defaults by IL&FS, both public sector and private sector banks almost stopped lending to NBFCs. An asset-liability mismatch in the operations of NBFCs such as IL&FS is a fundamental issue, which means that these firms raise capital from the markets for 6 months to 1 year and lend for longer tenures of 3 to 5 years. Many strong NBFCs have been resorting to such practice of borrowing short from Mutual Funds and lending long to arbitrage on the interest rate and earn higher NIMs.
As a consequence, ongoing liquidity situation for NBFCs remained tight till January end of 2019. Another fall out has been that NBFCs were slapped with higher borrowing costs, given the adverse sentiment in the NBFC sector.
Things are settling down since February 2019 and even though the crisis is expected to blow over soon, it is believed that the easy money-making period of this sector will not come back soon. Strong economic growth of the past 4 to 5 years that led to robust expansion of NBFCs will not continue in this fashion. Newer NBFCs will see their first downturn and companies with models that can withstand downturns will survive and grow.
Surviving the Tumultuous NBFC Market - SAFL Case Study
Closer home, Sustainable Agro-commercial Finance Ltd. (SAFL) has managed to survive the tempest experienced by the NBFC markets. Post investment from Mandala Capital*, SAFL continues to pursue the strategy of being multi-product and multi-locational. No asset liability mismatch, and conservative lending practices gives it a distinct edge from the risk management and scalability perspective. The focus across 10 different products to cater to varying needs of farmers is a sound policy.
SAFL is focused on strengthening its franchise, capitalising on new opportunities and investing in growth while exercising prudence where required in the context of challenges in the environment. SAFL believes this strategic approach will drive continued strong performance in the years ahead.
*Myriam Chang, Managing Director of Mandala Capital, sits on the Board of Directors of SAFL.
"SAFL’s operational strength and experienced management allowed it to show resilience during recent market disruptions. Mandala Capital remains committed to the company and the sector, and will continue to work closely with SAFL to further sustainable growth."
Mr Arvind Sonmale is the Managing Director & CEO of SAFL. A career Banker in the industry for over 41 years, he was the Chief General Manager handling Corporate Finance and Recoveries in Exim Bank, Mumbai, and Managing Director and CEO of Global Trade Finance Ltd (GTF) with equity participation from IFC, Washington and FIM Bank, Malta. He has been on the managing councils of Industry Associations such as CII, IMC, and Indo-Italian Chamber of Commerce. Mr Sonmale set up SAFL from the drawing board stage to its current pre-eminent status in agriculture finance in India.