NBFCs seek more collateral for loans

Although lending is picking up, risk aversion is still showing with non-banking finance companies (NBFCs) seeking higher collateral while sanctioning loans.

Sources at NBFCs said that in certain cases, such as promoter funding, NBFCs have not just doubled the collateral requirement but are also seeking more securities to cover themselves against the risk of default.

For instance, for promoter loans, with only shares pledged as the security, the average cover required is around three times the value of the loan, as against twice the value six months ago.

“It all depends on the promoter and the liquidity in the shares that have been pledged. It can go up to four times, but the minimum is around two-and-a-half times the value of the loan,” said a senior executive at a large NBFC.

 

Since October 2008, NBFCs have been borrowing from banks at a much higher rate, while dealing with higher chances of default. Consequently, banks’ outlook on NBFC lending has been hit, compelling finance companies to seek higher collateral.

The trend is not confined to just promoter funding. NBFCs in the infrastructure and vehicle financing space are also seeking more securities to cover loan defaults.

Infrastructure and vehicle financing NBFCs, which used to take collateral of up to 90 per cent of the loan amount earlier, are now asking borrowers to place higher collateral either in the form of cash, equity or direct equity participation for availing loans.

Sources at one of the largest infrastructure financing companies said that the company now seeks collateral of up to 120 per cent of the loan amount as against 80 per cent earlier.

While refusing to discuss specific issues, a senior IDFC executive said, “In general, there is an increase in the security that lenders are asking for as they are more cautious. But it is case-specific and depends on the deal and the promoter.”

In case of project loans, however, lenders said that the earlier collateral – which came in the form of a charge on cash flows, promoter guarantee, pledging of shares and corporate guarantee – have been sufficient to cover the risks.

Infrastructure finance company Srei said that it is seeking at least 10 per cent higher collateral against all loans as the slowdown had intensified.

“The collateral amounts vary according to the borrower’s profile and the asset quality. Earlier, the collateral amounts were in the range of 60-90 per cent,” said Srei Infrastructure Finance Chairman and Managing Director Hemant Kanoria.

Reliance Capital Chief Executive Officer Sam Ghosh said that, when there was stress in the system, NBFCs had to ensure that the quality of loans was maintained.

“One way to do this is to migrate the business more towards secured portfolio, while the other way is to go for higher collateral in case of unsecured loans. We are gradually moving more towards asset-backed financing where we ask for collateral, such as home, factory, equipment and machinery. In cases of unsecured loans, we now ask for higher down payments,” said Ghosh.

In addition, NBFCs are seeking higher upfront payment. The maximum funding available was around 65 per cent now, as against 70-75 per cent earlier, Ghosh added.

NBFCs like Shriram Transport Finance (STFL) now seek higher contribution from its customers in the form of equity participation.