Friday, May 14

financial sector: Financial services sector: Tackling demand and credit crises

Shachindra Nath, founder of U GRO Capital, seems to have hit a sweet spot in 2019, a difficult year for the financial services sector. His private equity-backed non-banking financial company (NBFC) not only got Flipkart co-founder Sachin Bansal to invest in October, top lenders such as ICICI Bank, SBI and Bank of Baroda also started co-lending with the company.

Not all lenders have been so lucky though, as Nath admits, and explains how U GRO’s tech-driven platform helped him convince banks to co-lend to borrowers assessed by his company. Co-lending spreads the risk — it does not place the entire loan on the NBFC’s balance sheet and the banks also do not lend to the NBFC but to the borrowers directly. One of the key issues the country’s financial sector faces today is how to transfer the excess liquidity sitting with risk-averse banks, especially public sector banks, as credit to fund consumption growth. There are two problems: first is about making liquidity available to a wider set of lenders — the NBFCs or shadow banks — and the second is, of course, slacking credit demand.

Nath points out that schemes like co-lending, partial guarantee and onward lending that were brought in last year are yet to benefit the wider set of NBFCs as banks remain risk-averse. For banks, too, credit offtake has become a problem and, in many ways, their hands are tied. Sheshagiri Rao, joint MD & group CFO of JSW Group, says banks are not financing large projects – be they in public sector or private sector. Neither are banks lending to help restructure a debt-laden company. “There is too much regulatory focus on provisioning for bad loans.”

Arun Singh, lead economist at Dun & Bradstreet, says the sector needs a cushion to be able to lend with confidence again. “There is a supply side problem when it comes to credit. Risk aversion is high. Timely completion of cases referred to insolvency courts would have been a good way to support banks and other lenders. But that is not happening.” Luckily, the government has shown the propensity to take measures whenever needed, without linking it to the budget, he says.

Sumit Bali, CEO of IIFL Finance, says the budget can do well to help revive demand in certain consumer sectors like automobiles or housing to increase credit offtake. “Corporate tax cuts created an opportunity, but if demand issue is not sorted, that move will be wasted.” Governments have often tinkered with foreign direct investment (FDI) norms in budgets. One measure of inducing confidence in financial services would be to allow more multinational companies with evolved processes and financial muscle to play in the market.

Ritu Arora, Asia CEO and CIO of Allianz Investment Management, bats for allowing foreign players control JVs, especially in insurance where FDI is limited to 49%. She says: “The world over, pension funds and insurance companies are considered the bedrock of the financial system. And it is time India fully welcomed the deep technical knowhow and evolved investment capabilities these global companies can bring. We hope FDI in insurance is allowed with management control to attract large and stable capital inflow.”

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