SBI's OTS scheme may have a ripple effect on NBFCs

Industry experts don't foresee a knee-jerk reaction from customers yet

A few days ago when State Bank of India (SBI) announced a one-time settlement (OTS) scheme for tractor and farm equipment loans, it signalled that instalment collections may take some time to recover. While investors in non-banking finance companies (NBFCs) haven’t encountered a similar situation over the past few years, there are concerns whether SBI was setting the stage for more of such leeway. Election promises and demands in states such as Uttar Pradesh and Maharashtra, which favoured farm loan waiver, also increases concerns. 

A senior executive of a private bank states that while a farm loan waiver looks unlikely as state governments don’t have the money yet to compensate banks for the loans waived, schemes such as SBI’s OTS on farm and tractor equipment loans may tempt customers to negotiate with their NBFCs on similar lines. “If it was easy to interpret Reserve Bank of India’s 60-day dispensation as loan waiver, the OTS scheme may play more on customer sentiment,” he states. 

Analysts are particularly cautious on cash-dependent NBFCs as their road to recovery looks stretched. Collection efficiency details provided by microfinance institutions (MFIs) such as Ujjivan Financial Services and Bharat Financial Inclusion suggest the same. Collection efficiency of Ujjivan stood at 89.4 per cent in February 2017 as against a near 97 per cent seen prior to demonetisation. That of Bharat Financial Inclusion was at 92.4 per cent as of February 28, 2016, versus the normal 98 per cent. “While business didn’t get impacted much in the December quarter due to good October collections, companies were cautious about the March quarter. They are hopeful of a bounce back in FY18, but we don’t know when exactly that would happen,” says Siddharth Purohit of Angel Broking. 

While this is for the MFI business, experts believe SBI’s move may also impact vehicle financiers. Collection efficiencies haven’t returned to normal levels for vehicle financiers. Experts says that while there has been an improvement in March on collections, it still is a bit distant from normalcy. That said, Ramesh Iyer, vice-chairman & managing director, Mahindra & Mahindra Financial Services, says SBI’s OTS scheme is positive for the vehicle financing industry. “SBI’s move indicates there is buoyancy in the market for people to pay off the dues and this will ensure that prices of used vehicles don’t crash.” However, he also flags off that customers do walk in to the branches asking for an incentive on loan repayment. Experts say this trend could become widespread if collection patterns don’t return to normalcy soon. They say it may be prudent to wait for the March quarter results before taking fresh exposure to NBFC stocks.