Tag: NBFCs

RBI warns NBFCs: Will not hesitate to take supervisory action if regulations are circumvented

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) has cautioned non-bank financial companies (NBFCs) that any “misguided or intelligent interpretation” of regulations to circumvent rules to their advantage will invite appropriate action against such entities.

Speaking at a conference of heads of assurance of NBFCs in Mumbai this week, RBI Deputy Governor Swaminathan J said the regulator had observed that there are some misguided or intelligent interpretations in the market to circumvent regulations, “which poses a significant threat to the integrity of the financial system.”

The comments assume significance amid the recent regulatory action against NBFCs such as IIFL Finance and JM Financial for various regulatory lapses, leading to RBI imposing strict business restrictions on the entities.

“When individuals or regulated entities start interpreting regulations to their advantage or for their gain, it undermines the effectiveness of regulatory frameworks and compromises the stability and fairness of the market…RBI’s supervision will review the substance of such transactions over their legal form.

Also Read: RBI’s draft norms on project financing to hit credit cost by 7-8 bps: Bank of Baroda

Should we encounter instances of such circumvention of regulations, we will not hesitate to initiate appropriate supervisory action, as has been demonstrated in some of our recent actions,” Swaminathan J told the gathering of heads of assurance functions of NBFCs.

“Assurance endeavours, especially internal audit and compliance should transcend mere box-ticking exercises and delve into addressing root causes of the issue,” the Deputy Governor said.

Acknowledging the growing importance of NBFCs in the system, Deputy Governor Swaminathan J said while NBFCs have embraced technology in a big way to expedite and streamline their reach and credit delivery process, added “This has also brought certain systemic risk, complexity and interconnectedness, which is the reason as to why the Reserve Bank has of late been engaging with this sector more often than before.”

Among three key risks for the NBFCs, Deputy Governor Swaminathan J pointed to cybersecurity and operational risks, especially the threat of data breaches and unauthorized access to sensitive information, as well as other forms of cyberattacks, including malware infections, phishing scams, and ransomware attacks.

“Many NBFCs are increasingly turning to rule-based credit engines to accelerate the growth of their lending portfolios. While automation can enhance efficiency and scalability, NBFCs should not allow themselves to be blinded by these models.

It is crucial to recognise that rule-based credit engines are only as effective as the data and criteria upon which they are built. Overreliance on historical data or algorithms may lead to oversights or inaccuracies in credit assessment, particularly in dynamic or evolving market conditions,” the Deputy Governor warned.

Also Read: RBI bars Kotak Bank from onboarding new online customers, issuing new credit cards

The Reserve Bank of India has on multiple occasions pointed to risks from the unusually high growth in the unsecured retail segment, and even raised risk weights for lending to the segment in a bid to slow down its pace of growth.

“There appears to be a fancy among most NBFCs to do more of the same thing, such as retail unsecured lending, top-up loans or capital market funding. Over-reliance on such products may bring grief at some point in time later. It is also observed that the risk limits that are fixed for certain categories of products or segments say unsecured lending, in some entities, are way too high to be sustainable in the long run. I hope risk managers make a professional assessment of such risks that may be building up in their books,” the deputy governor reiterated.

He added, that amidst the escalating complexity of risks, it was disconcerting to note that NBFCs have the lowest average number of compliance staff relative to their size compared to other sectors like commercial and cooperative banks.

“Despite regulatory measures aimed at ensuring the autonomy of these functions, it is disheartening to encounter instances where heads of assurance functions are given junior positions within the hierarchy or there is a lack of direct access to the board…Such practices undermine the effectiveness and independence of assurance functions, potentially exposing NBFCs to heightened risks, thereby attracting enhanced regulatory scrutiny,” he said.

Also Read: RBI tells NBFCs to ‘strictly adhere’ to cash disbursal limits as per IT rules

Alluding to instances of unfair practices in charging of interest by some financial entities, Swaminathan J said transparency in pricing is essential to build trust and confidence amongst customers, warning NBFCs that “excessive rates will invite supervisory scrutiny.”

“During our onsite examinations last year, we identified instances of unfair practices in charging of interest by many entities. These include charging interest from the date of loan sanction or agreement execution rather than from the actual disbursement of the loan, charging interest from the date of the cheque for loans disbursed through cheques, despite handing over the cheque to customers much later, and levying interest for the entire month instead of the period for which the loan was actually outstanding. Additionally, some NBFCs collected advance instalments but calculated interest based on the full loan amount,” he said.

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L&T Finance open to divesting wholesale book if valuations are right

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Sudipta Roy, CEO of L&T Finance, says the company will consider divesting its wholesale book if it gets the right valuation.

“We will not go and take a haircut just because we want to get it off the balance sheet,” Roy said in a chat with CNBC-TV18.

Below is the verbatim transcript of the interview.

Q: Will you be able to completely pare down the wholesale book and is the sale of the wholesale book an option that you are examining?

A: When we started the Lakshya journey, our wholesale book was over ₹38,000 crore. At the end of last quarter, we got it down to ₹5,500 crore and we told in our analyst call that at the end of April, we are at ₹4,400 crore. So, see the book which is left on the book is largely a standard asset book and we are in no hurry to pare it down. So, we will not go and take a haircut just because we want to get it off the balance sheet. As in when we get good valuation, we will consider divestment. But if we don’t get good valuation, if there are no takers, we’ll run them down at the normal course of sort of amortization.

Q: Since the focus very much squarely is on the retail side of the business, just give us a sense of what are the engines of growth you see, and with this home loan product that you’ve launched, give us a sense of how you expect this particular vertical to grow for L&T Finance?

A: If you look at our positioning, and we are very uniquely positioned as a sort of non-banking financial services company, because we are 50% urban and 50% rural. Very few NBFCs have equal strengths in rural as well as an urban. If you see our sort of strengths in the rural area, we are one of the market leaders in microfinance, and join lending group loans. And then we are one of the market leaders in tractor finance. So these are two of our large businesses. So we will grow those businesses and those businesses have been doing quite well. The farm business, especially the tractor business was sluggish last year, primarily because of bad rains. But because good rains have been projected this year, we expect that business to have a good uptake post maybe August.

Q: What kind of growth rates are you looking at for FY25?

A: For FY25 – we have said that overall, our growth rate targets are 25% as part of Lakshya guidance. So we expect that we will hit those numbers going forward. We expect to do better, but our guidance is that we will hit those numbers of 25% plus.

Also Read | L&T Finance Q4 retail disbursements rise 33%

Q: While within retail personal loans is a very small part of the book, you told us it’s about ₹5,500 crore, but still given the concerns that the regulator has highlighted with respect to the growth of that business, you said you’re going to take it slow, but just set out for us what your sort of targets for that particular segment is if it’s going to come down from these levels will you go very slow and growing it?

A: We have slowed down personal loans growth in the last two quarters. If you see, our average run rate was ₹1,300 crore a quarter, we slowed it down from ₹1,300 crore to about ₹850 crore and then last quarter we have done about ₹results boar950 crore. This is a consumption category. This is a segment in which there is demand in the market. This segment gives reasonable RoAs and I do believe that if you run a sensible credit risk programme, there is money to be made at acceptable risk costs. So, given the fact that we as a company have this part of a second pillar is that we will build a very strong credit framework, we will continue to grow this business, like all other lines of business, but we will continue to grow this business in a risk calibrated fashion. And at acceptable growth rates. We will not be growing this business at breakneck speeds – at acceptable growth rates.

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Q: A quick word on your cost of borrowing as well since the implementation of the higher risk weights for bank lending to NBFCs, even though your rating is fairly decent at this moment, how’s the cost of borrowing panned out and with the RBI rates where they are, how do you expect it to be?

A: If you see our cost of borrowing, it went up by one basis points between Q3 and Q4 – from 7.81 it went to 7.82. So that has been one of our strengths last year, whereas our cost of borrowing has been very stable. But given the RW increase, and given that now, we are all sort of resigned to the fact that rates are longer – that the current rate regime will be longer, we expect our rates to go up by anywhere between 30 bps and 35 bps over the next financial year, from that current levels. So current levels we are at about 7.81-7.82, so more or less, we know we can expect a rate sort of to go up to anywhere between 8.1 and 8.15. that is what we are looking at.

Q: Even on the margins, you expect some pressure to continue?

A: One of the things that you have to note that we had a large wholesale book as a wholesale book was average yield of about 10.5-11%. And our retail is an average yield of 15.5-15%. So as our wholesale book pares off, you have retail book replacing it. So anyway, your margin sort of distribution within the book changes. And the retail book is obviously at a very low level of Rs 4,400 crore, our net interest margins (NIMs) are about 11.25%, we expect a small margin of movement but the fact is that I think we are at the top end of the NIM expansion cycle.

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But obviously, we are working on many areas, for example, fees is an area in which we are trying to improve. For example, we have recently got a corporate Insurance Agency licence. Previously, we could do insurance attachment only at the point of sale, as a trade sheet attachment. Now we can sell more sophisticated insurance products through the cycle. So we’re looking at expanding our fee lines as well. So overall NIMs and fees – every organisation tries to take the NIMs and fees higher. So that objective will continue. And what we’re doing is that we obviously see maybe a 30-35 basis points increase in our cost of funds over the next 12 months. We will try to at least neutralize that.

For more, watch the accompanying video

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RBI tells NBFCs to ‘strictly adhere’ to cash disbursal limits as per IT rules

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) on Wednesday (May 8) sent an advisory to select non-bank financial companies (NBFCs), asking them to strictly adhere to Income Tax rules on cash disbursal, weeks after the regulator imposed restrictions on IIFL Finance’s gold loans business for violating this norm, among others, CNBC-TV18 has learnt.

CNBC-TV18 has seen a copy of the letter sent by RBI to NBFCs, which refers to Section 269 SS of the Income Tax Act, 1961, which stipulates that no individual can receive more than ₹20,000 as a loan amount in cash. The regulator, in this letter, said, “No NBFC should disburse the loan amount in excess of ₹20,000 in cash, in no uncertain terms.”

RBI asked NBFCs to “strictly adhere” to these provisions of the Income Tax Act. The letter has been sent from the RBI’s Department of Supervision in Thiruvananthapuram, and addressed to NBFCs in the state of Kerala, where gold loan NBFCs are widely at play, said a person directly in the know. Among others, the letter has been sent to Manappuram Finance, as well as Muthoot Finance, two of the largest players in the gold-loan space, said a source in the know who did not wish to be quoted.

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The scale-based Master Directions for NBFCs clearly specify that non-banks must ensure compliance with the requirements under Sections 296SS and 269T of the Income Tax Act, 1981. Section 269T & 269SS of the Income Tax Act are enforced to ensure compliance with tax regulations around accepting and repaying loans and deposits. While Section 269SS deals with accepting loans, Section 269T deals with repayment of loans.

“RBI has been getting multiple queries from gold loan players about whether they really have to stick to the ₹20,000 cash disbursal limit after the IIFL Finance action,” said a person familiar with the matter, adding that the regulator has sent the letters to re-iterate the master directions on scale based regulation which state that NBFCs must follow the IT Act rules on cash disbursals and repayments.

While the regulator has not stated anything to indicate if any immediate action would be taken on entities not following directions, the letter is seen as a warning to lenders who may not be following these rules.

The RBI on March 4 had placed business restrictions on one of the largest gold-loan NBFC, IIFL Finance, “for significant disbursal and collection of loan amount in cash far in excess of the statutory limit,” among other reasons.

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As per industry sources, the practice of disbursing cash loans far in excess of this ₹20,000 limit is not an uncommon practice among gold loan NBFCs. When CNBC-TV18 raised this issue at the RBI’s last monetary policy press conference on April 8, that many players in the industry were doing cash disbursals in excess of the limit, Governor Shaktikanta Das replied, “We supervise all entities, all major entities. Wherever we see a problem, we first directly engage with the particular entity to see that corrective actions are taken. Where we see that the problems are huge or the problems are persistent, then only we act.”

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

BNP Paribas sees opportunities in this sector hiding in plain sight

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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According to Santanu Chakrabarti, India Analyst, BFSI, BNP Paribas, the appetite and interest in public sector undertaking (PSU) names is good. He believes there are opportunities hiding in plain sight in the banking, financial services and insurance (BFSI) sector.

In the non-banking finance (NBFCs) space, Bajaj Finance is his top pick.

He believes the net interest margins (NIMs) of the banking sector for April to March 2024-25 will look better if the rate cut comes in October instead of August.

NIMs typically bottom out a quarter after the rate cuts because now so much of the lending is repo rate-linked, he noted.

He expects a small disappointment in Axis Bank’s numbers, which are scheduled for release on April 24.

“Mainly because the market is probably building in a slightly higher NIMs than what we expect. Having said that, Axis Bank is my third preferred pick within Indian banking,” he said.

Sharing his view on the fraud at Mahindra and Mahindra Financial Services , due to which the company deferred the release of its quarterly results, Chakrabarti said, “Any event that comes out in a financial services business which raises question marks about processes etc., will be generally taken fairly seriously by the market. And the burden of proof generally lies with the company.”

On April 22, Mahindra Financial notified the exchanges about a fraud totalling ₹150 crore, which took place at one of its branches in the North East region. This fraud involves forgery of Know Your Customer (KYC) documents, leading to the embezzlement of company frauds.

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For more, watch the accompanying video

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Anand Shah of ICICI Pru AMC is bullish on these sectors

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Anand Shah, Head-PMS and AIF Investments, ICICI Pru AMC continues to remain overweight on manufacturing sector and underweight on the information technology space.

Along with manufacturing, he has been overweight on power and banks.

“Power is another area where we are seeing growth sustaining into the next few years. Apart from that, corporate banks would also be beneficiaries of recoveries of the past non-performing assets (NPAs),” Shah told CNBC-TV18.

He believes the growth expectations from the IT sector need to be reset.

“There is still some time to go before the real growth that one would see in the IT companies and what investors are expecting – that misalignment is still a few quarters away,” he said.

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In the cement space, he believes the next three months would see a general slowdown ahead of the elections .

However, from a long-term perspective, urbanisation leading to growth in housing will be the key driver for the cement sector.

“Cement would be the key ingredient in infrastructure and housing. So we have been underweight on cement for a while but that is one sector which will have good growth, good operating leverage given that the pricing is weak,” he said.

For more, watch the accompanying video

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

India Ratings forecasts margin pressure for NBFCs in FY25

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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India Ratings and Research expects net interest margins (NIMs) of non-banking finance companies (NBFCs) to be under pressure at least during the first half of FY25. It has a neutral outlook on the sector considering factors such as ongoing growth, stable asset quality, and adequate capital buffers.

Speaking to CNBC-TV18 to Pankaj Naik, Director at India Ratings & Research said, “Post the increase in the risk weights (by the RBI), obviously, the funding cost increased for NBFCs from banks, and banks had already taken a good amount of exposure on the NBFCs sector per se. So we had factored that in. We did the articulate that we will see some margin compression, which we saw in FY24. We believe the rates are going to be alleviated even for FY25.”

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He attributed this compression in margins not only to the increased funding costs but also to the rising leverage within the sector. As leverage grows, the equity contribution towards growth decreases, further impacting margins.

Naik pointed out that the Reserve Bank of India (RBI) is closely monitoring developments in the fintech space, indicating potential regulatory actions or interventions in the future.

Highlighting regulatory developments, Naik noted the Reserve Bank of India’s (RBI) scrutiny of the fintech space. While fintech’s assets under management (AUMs) are relatively small compared to the overall sector, their interconnectedness with banks and NBFCs elevates risks.

Consequently, fintech growth in FY25 is expected to be moderate due to regulatory scrutiny and cautious funding partners.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

This analyst is cautious on Bajaj Finance and bullish on CV finance space

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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GreenEdge Wealth Services founder Digant Haria on Wednesday, January 17, expressed caution on Bajaj Finance while being optimistic about the commercial vehicle (CV) finance sector.

According to Haria, Bajaj Finance has been a champion in the traditional lending space, reaching new customers with loans.

However, the digital world is bringing new challenges and competitors.

Haria highlighted concerns raised by the Reserve Bank of India (RBI) about the personal loan space.

He pointed out that Bajaj Finance faced hurdles, such as a credit card extension restriction with RBL partnership.

Despite reporting positive numbers for the past two quarters, Haria anticipated a phase of consolidation for Bajaj Finance.

He suggested that the company might stabilise without significant growth in the coming quarters.

However, he said, “There’s no reason to be negative on Bajaj Finance in my view, nor should we expect any magic from Bajaj Finance.”

In contrast, Haria expressed bullish sentiments towards the commercial vehicle (CV) finance space. He identified Shriram Finance and M&M Finance as promising players in this sector.

Haria cited the strong prices of used trucks and increased rural infrastructure activities as positive factors.

With these conditions, the cash flows for individuals using trucks and tractors are expected to improve.

Haria further pointed out that gold is poised to reach a lifetime high, providing tailwinds for gold finance companies.

In the current heated market, he added that investing in housing finance could offer a favourable risk-reward balance for medium to long-term investors.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Macquarie Capital’s Q3FY24 expectations for banks and NBFCs

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Suresh Ganapathy, Banking Analyst at Macquarie Capital predicts further margin compression and challenges for Indian financial institutions in the third quarter (October-December) of the current financial year.

“Because last year, Q3 is when the bulk of deposit rate hikes happened in a big way, so considering usually most of the deposits comes in the 12-month category you would see deposit costs further inching up in Q3 and margin should come down across the board,” he said in a conversation with CNBC-TV18.

Ganapathy expects a muted performance for HDFC Bank for the third quarter. He explained that the Street was expecting that the incremental cash reserve ratio (ICRR) impact, which was felt in the second quarter could get reversed. While it will get reversed in the third quarter, there is still an upward deposit repricing.

So margins will not necessarily pick up or maybe even see slight downward bias in the third quarter, which will be a disappointment for .

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Ganapathy suggests that for HDFC Bank’s stock to perform well, there is a need for margin improvement and a flow-through of core pre-provision operating profit (PPOP) growth. Any failure in these aspects during the quarter may disappoint the market and affect the stock’s performance negatively.

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The analyst predicts a challenging quarter for all banks, with year-on-year numbers expected to be adversely affected by upward deposit pricing. For ICICI Bank, he anticipates a hit on its PPOP growth due to margin compression.

The brokerage recently downgraded State Bank of India (SBI) and Bank of Baroda, citing weakened corporate recoveries and an inevitable decline in margins due to the falling rate cycle. This leads to a projection of downward pressure on Return on Assets (ROA) over the next two years for public sector banks.

He also highlighted the Reserve Bank of India’s (RBI) unease with banks’ credit growth toward Non-Banking Financial Companies (NBFCs), which has been running at 30%. He anticipates a gradual reduction in loan growth for NBFCs over the next six months due to supply-related constraints from the banking system.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

U GRO Capital says co-lending is the future of NBFCs, eyes more partnerships with private banks

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Mumbai-based small business lending fintech platform U GRO Capital believes co-lending is the future of non banking finance companies (NBFCs) in India. The share of co-lending in U GRO’s asset under management (AUM) is currently at around 50%. The company has partnered with public sector banks aim to partner with private banks also now.

U GRO Capital specialises in providing customised loans to Micro, Small, and Medium Enterprises (MSMEs) in India.

Speaking to CNBC-TV18, Shachindra Nath, VC & MD said U GRO partners with banks and supplements their business when they face a constraint in terms of onward lending to NBFCs. “We have been stable with at least four banking partners, and we have a pipeline of another five and six, some of which we will be initiating during this quarter,” he added.

While U GRO Capital has predominantly partnered with public sector banks, the company is now expanding its collaborations to include private sector banks.

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Nath anticipates disbursements in the range of ₹9,000-10,000 crore for the upcoming financial year, showcasing the company’s commitment to sustained growth.

He said, “We are seeing steady growth our capacity is around ₹550 crore a month and we have been rolling that capacity. We should end between that ₹9000 to 10,000 crore growth nearer to lower side of the ₹10,000 crore target which we should achieve.”

He also highlighted the impressive profitability growth from ₹7 crore PAT in FY22 to ₹40 crore in FY23, expressing confidence in surpassing the ₹120 plus crore target.

The market cap of U GRO Capital is ₹2,534 crore and it competes with peers such as Cholamandalam Finance, Sundaram Fin and L&T Finance.

The fintech platform’s stock gained nearly 82% in 2023.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Corporate loan growth set to make a comeback in 2024: Bernstein’s Pranav Gundlapalle

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Pranav Gundlapalle, a Senior Analyst specialising in India financials at Bernstein, on Friday, January 5, said that corporate loan growth is set to make a comeback in 2024. In an exclusive interaction with CNBC-TV18, he hinted at a departure from a consumer-centric growth model towards a renewed focus on corporate credit.

Gundlapalle highlighted the prolonged period where consumer-driven growth dominated the banking sector. However, he underscored emerging indicators pointing towards an imminent revival in corporate credit.

“This could be the single biggest differentiator amongst banks this year,” he expressed, emphasising the impact this shift might wield within the sector.

The senior analyst highlighted the selective nature of corporate credit growth, predicting that a few large banks may capture a disproportionate share of the market.

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Gundlapalle predicted a consequential differentiation in growth dynamics, foreseeing a split between larger banks and their smaller counterparts.

He attributed this to the potential limitations posed by deposits, stating that banks with stronger deposit franchises, as indicated by an improved Current Account Savings Account (CASA) ratio, would likely experience accelerated growth.

The discussion extended to the attractiveness of certain financial entities, with Gundlapalle singling out NBFCs like Bajaj Finance as potentially beneficial entities amidst anticipated rate cuts.

“Especially the ones with fixed-rate loan books will stand to benefit,” he said.

Additionally, Gundlapalle pointed towards banks like IndusInd Bank, positioned to capitalise on reduced funding costs while maintaining a robust asset side, as potential beneficiaries in this evolving financial landscape.

Also Read | HDFC Bank Q3 business update: Gross advances grow 62.4%, retail loans 111% up

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow