More pincer moves: Shadow banks may soon be governed by regulatory regime

Just when you thought that some non-banking financial companies (NBFCs) have got a lifeline through the hope of conversion into a bank, comes the move for a regulatory approach linked to their systemic-risk contribution. The big names in the business prefer not to go on record and would rather wait to read the consultation paper on the issue.

“My sense is that the numbers for the current quarter will give us the correct post-moratorium picture,” says the chief executive officer of an NBFC. 

The Reserve Bank of India’s (RBI’s) supervisory returns show that 29 per cent of their customers and 49 per cent of their assets were under moratorium at end-April this year — the latest available systemic data. The split-up for banks on this front is 66.6 per cent (number of customers who availed of the moratorium) and 67.9 per cent (assets under moratorium).

“A few large NBFCs had given a moratorium to their bigger corporate borrowers. And that is why the figure for percentage of assets under moratorium is higher than the number of customers who had availed of it,” observed a senior NBFC official on the variance on this data-point between shadow banks and banks.

Worsening numbers 

A total of 9,601 NBFCs were registered with the central bank at end-March 2020, of which 66 were deposit-accepting (NBFCs-D) and 278 were systemically important non-deposit-accepting NBFCs (NBFCs-ND-SI). And although the combined balance-sheet size of NBFCs is about one fifth of that of banks, their importance is in last-mile credit delivery.

It’s the ability of NBFCs to secure funding that is a point of concern. Banks and market borrowings account for over 70 per cent of total outside liabilities of NBFCs. With the waning of market confidence, the share of long-term market debt (non-convertible debentures) in the NBFC sector’s total borrowings sector declined to 40.8 per cent at end-December 2019, from 49.1 per cent at end-March 2017. The consequent funding gap was met through bank borrowings, which rose from 23.1 per cent of total borrowings to 28.9 per cent over this period, according to the Financial Stability Report (FSR) of July 2020.

The smaller and lower-rated NBFCs (AA-rated or the unrated) have been shunned by both banks and markets. This was reflected in the lacklustre response to the Targeted Long-Term Repo Operations 2.0. While only the higher-rated entities were able to raise funds, the reality is that they have also started maintaining liquidity cover of two to three months, despite the higher costs. 

The central bank’s FSR (July 2020) had referred to the system-level stress tests for NBFCs’ aggregate credit risk for the quarter ended December 2019 carried out under three scenarios, which it said would result in the capital adequacy ratio (CAR) slipping to 17.2 per cent from 19.4 per cent in the first scenario; to 16.4 per cent in the second scenario; and to 15.2 per cent in the third scenario. The stress tests’ result on individual NBFCs indicate that, under these three scenarios, 11.2 per cent, 14 per cent and 19.5 per cent of the NBFCs would not be able to meet the minimum regulatory capital requirement of 15 per cent. The CAR for the sector as a whole was 19.6 per cent in March 2020, which was lower than the 20.1 per cent a year earlier; and a sharp fall from 26.2 per cent in 2014-15. 

Digest the numbers

• Capital position: The capital adequacy for NBFCs was 19.6 per cent in March 2020, lower than the 20.1 per cent a year earlier, and a sharp fall from the 26.2 per cent in 2014-15
• Moratorium picture: 29 per cent of NBFC customers and 49 per cent of their assets were under moratorium at end-April 2020. The split-up for banks on this front is 66.6 per cent (the number of customers who availed of the moratorium) and 67.9 per cent (assets under moratorium)
• Funding profile: The share of non-convertible debentures of NBFCs fell to 40.8 per cent at end-December 2019, from 49.1 per cent at end-March 2017. The gap was made up from bank borrowings, which rose from 23.1 per cent of total borrowings to 28.9 per cent over this period
• The pecking order: The combined balance-sheet size of NBFCs is about one-fifth that of banks, but their importance is in last-mile credit delivery

“The very fact that the central bank is now to come out with a dividend policy for NBFCs going forward is a clear indication of what they think of our capital positions,” says the chief executive officer of an NBFC.

In its monetary policy announced last Friday, the RBI said “… currently there are no guidelines in place with regard to distribution of dividend by NBFCs. Keeping in view the increasing significance of NBFCs in the financial system and their interlinkages with different segments, it has been decided to formulate guidelines on dividend distribution by NBFCs. Different categories of NBFCs would be allowed to declare dividend as per a matrix of parameters, subject to a set of generic conditions.”

So, what’s in store in the immediate future? The banking ambitions of NBFCs could be a casualty, contrary to what has been widely speculated after the RBI’s internal working group’s report on large corporates being allowed into banking.