Conserve capital, the loud, clear message from RBI to NBFCs and banks

Muthoot Finance and Axis Bank are instances of the regulator objecting to acquisitions

With assets under management (AUM) of Rs 47,000 crore and a liquidity comfort of 25 per cent tier-1 capital adequacy, the Reserve Bank of India’s (RBI’s) decision to reject Muthoot Finance’s application to buy IDBI Bank’s asset management company (AMC) for Rs 250 crore came as a surprise.

Lack of consonance with the activity of operating a non-banking financial company (NBFC) seems to be the reason behind the decision. For a lender diversified into segments such as microfinance and affordable housing, it is a natural aspiration to look beyond the usual streams of lending business. When larger peers such as HDFC and Aditya Birla Capital are among the leading examples of NBFCs diversifying into non-lending businesses, for Muthoot Finance this deal would have been a progressive step.

Yet, if the RBI chose to walk this path, it reaffirms the regulator’s repeated cautions on lenders having to conserve their capital. At the Business Standard Banking Conclave in August, Governor Shaktikanta Das indicated that preserving capital should remain banks’ focus and this was after a host of private banks had raised nearly Rs 50,000 crore.

Even in the case of Axis Bank, which has raised Rs 10,000 crore in FY21 (and Rs 12,500 crore a year ago), RBI is yet to okay its long pending proposal to acquire stake in Max Life Insurance. When the transaction was first placed in February, Axis Bank wanted to take as much as 30 per cent in the life insurer. With the terms not cutting the ice with the regulator, the bank had to reduce its stake purchase to 18 per cent in August and to 10 per cent in October.

In the September quarter (Q2) commentaries of banks and NBFCs, managements indicated that the asset quality problem induced by Covid-19 pandemic may not be as severe as envisaged. Recently, though, global ratings agency S&P has said otherwise. It says collection efficiencies could taper as household savings reduce and more importantly, masked by moratorium the easing of non-performing assets (NPA) may have been temporary. While the system level NPA abated to 7.6 per cent in Q2 from 8.21 per cent in FY20, S&P remains unchanged on its FY21 NPA estimates of 10.1 per cent. Forthcoming quarters, hence, could be a departure from Q2, validating the governor’s emphasis on capital preservation.

So, will Federal Bank at 14.64 per cent capital adequacy be lucky to see its proposal to acquire up to 30 per cent stake in IDBI-Federal Life go through?