Nbfcs In Vicious Cycle Of Excess Deposits

Non banking finance companies (NBFCs) are drastically shrinking their balance sheets in order to repay excess deposits. This is the first sign of a Reserve Bank of India (RBI) regulation-driven crisis brewing in the financial sector.

Some of the players picking up securitised assets of NBFCs are Industrial Credit and Investment Corporation of India (ICICI), State Bank of India, Bank of Baroda and ABN Amro Bank.

The shrinking of balance sheets is expected to take NBFCs into a vicious circle of downgrades by credit rating agencies which will force them to further reduce the balance sheet size to meet deposit repayments. Apart from the Reserve Bank order forcing NBFCs to reduce deposits in line with the rating, the renewal of deposits and accretion of fresh deposits has slowed down.

 

Says P M Thomas, managing director, Credit Analysis and Research (CARE): The renewal rates of NBFCs have fallen to 40 per cent of the existing deposits from 60 per cent earlier. This in turn has forced NBFCs to sell portfolios.

The Reserve Bank ceiling on deposit raising has created a crisis among NBFCs. The apex bank has said that a leasing and hire purchase company with AAA rating can raise deposits upto four times its net owned funds (NOF). A AA company can raise deposits up to 2.5 times the NOF and a A-rated company can raise 1.5 times of its NOF.

Due to this diktat, some companies, including Mafatlal Finance, Lloyds Finance, Shriram Finance, are reportedly selling part of their portfolios.

When NBFCs sell portfolios it has to sell the best assets to entice buyers. Says Kalpana Morparia, general manager, ICICI: Some NBFCs have approached us for sale of their assets. We will pick up the best assets in their books.

It is pointed out that, once the best assets are sold, the portfolio of the NBFCs gets riskier. This will lead to downgrades by credit rating agencies. Since the RBI has linked the deposit rating ability to the credit rating, a downgrade will mean further repayment of deposits, which starts the cycle again.

Says R Ravimohan, managing director, Credit Rating Information Services of India Ltd (Crisil), There are a lot of top rated NBFCs wanting to sell assets. This creates the problem of non performing assets. In a scenario where the loan book was growing, an actual rise in NPAs did not lead to a percentage rise, but with the asset size falling, the percentage of NPA will increase.

However, on the flip side, the sale of assets will give huge profits to NBFCs. This is because most of the loans were given at high rates and will hence command a premium. But this will only be a one-time profit.

Thomas, however feels that, with the Reserve Bank giving a three year deadline to repay deposits, the pressure is off NBFCs.