Way to go

It is important that banks and NBFCs work together in the co-lending domain to ensure economic revival

With the world caught up in an unprecedented health crisis owing to the Covid-19 pandemic, the economic arc is in recession and the government is leaving no stone unturned to wade the nation out of it, as unscathed as possible.  

To revitalise businesses quickly, the government has extended many loan guarantee schemes for micro, small and medium enterprises (MSMEs) and the non-bank financial institutions (NBFCs). The Reserve Bank of India (RBI) has worked in tandem with the government’s efforts and has opened up a window for mutual funds to meet their obligations, which, in turn, has created a positive environment for MF investors. However, the liquidity has failed to reach the grassroots level.

Banks being averse to extending credit, it is now more challenging to see liquidity on the street. Even prior to the Covid crisis, banks had been reluctant to provide credit to borrowers. As of February 28, 2020, the credit growth rate had slowed down to 6.1 per cent. 
 

The Covid-19 fiasco compounded this situation with no clear sight of a recovery. Agencies predict a 5 per cent economic de-growth in GDP terms, reflecting an increase in the risk for banks. Banks continue to park more than Rs 8 trillion of their excess liquidity with the RBI, earning a negative carry. Additionally, NBFCs are also not part of a bank’s radar for lending.

Indeed, liquidity on the street and confidence in the system are two pertinent aspects that need immediate redressal. People are also prudent when it comes to spending money because the economic scenario is uncertain. If people start spending money, the economy will improve. To spend money, however, they need readily available capital. The role of NBFCs is crucial as they are better versed with the ground reality, having the adeptness needed to handle risks. In retail lending, by and large, the risk quantum is relatively low as small borrowers respect the lenders and are conscientious enough to honour their commitments. While they face many constraints, they mostly pay up sooner or later.

Banks often find it difficult to handle MSMEs due to the underwriting challenges and reach. As such, advanced technology and tools being used by the NBFCs for underwriting can now be extended to the banks. Considering that banks have their own inherent limitations in terms of time and cost, providing a real time response is often difficult. However, NBFCs are better positioned in this aspect.  

A Gujarati proverb says, “Jya na pohche Ravi, tya pohche Kavi” (where the sun cannot reach, the poet does). Similarly, where banks cannot reach, NBFCs can. The RBI, with a visionary streak, thought of a co-lending mechanism involving banks and NBFCs. Unfortunately, it has not been operationalised. Aside from co-lending, the other co-working method is FLDG (first loss default guarantee).

Co-lending is not getting operationalised as the RBI guidelines are cumbersome. For example, in KYC, when the NBFC has fulfilled all the obligations required by the RBI, banks should not be asked to do it again. The Securities and Exchange Board of India (Sebi) has stipulated that once KYC is done by one broker the same is not required to be done by other brokers. Based on the KRA data, the other broker can start his activity.

Meeting the policy requirements, the bank also has to undertake credit assessment as a rule. The question is, who will do the assessment? As most nationalised banks are decentralised, credit decision often rests with the nearest branch. Banks need to institutionalise a separate cell to handle co-lending requirements and loan bookings.

Also, interest rates cannot be lower than what is currently being charged, as there are in-built costs associated with lending. Since banks are financing 75-80 per cent of the loans, they want reduced interest rates. However, inherent operational costs and credit costs do not justify a reduction irrespective of the cheaper fund availability. For example, two-wheelers are being financed at around 24 per cent in the market. Most financiers don’t make enough money and once the delinquency takes place, the account moves to cash collection. As these are small borrowers who may not be able to repay loans on time and the operational costs need to be borne by the NBFCs, the interest rates cannot be lower.

The RBI also needs to provide relaxations when funding is to be done simultaneously in a joint account, as the current process of operating the joint account is cumbersome to the extent of maintaining zero balance at the end of the day and ensuring daily contribution in the agreed ratio.

Under FLDG, historically, banks grant loans to retail borrowers and NBFCs provide the first loss guarantee. The sharing of returns between banks and NBFC happen by way of service charges, which is subject to GST. This makes the co-lending arrangement more efficient and given our current circumstances, this is vital and of national importance.

The author is on the board of The Investment Trust of India Ltd

Views are personal