MSME lending: Worst yet to come; unless RBI bails out NBFCs, loan against property to fall more

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Published: September 12, 2019 2:21:40 PM

The value of loan against property (LAP) assets managed by HFCs and NBFCs went up by only 8.3 per cent over the six months to December 2018 down from 15.4 per cent rise over the previous six months, Moody’s said.

RBI had reportedly said last month that there won’t be a bailout package for NBFCs.

A day after Moody’s Investors Service cautioned reduced refinancing options for MSMEs on the back of non-banking financial companies (NBFCs) and housing finance companies (HFCs) pulling back on their exposure to MSMEs against property that is likely to cause loan delinquencies and defaults, NBFCs in India have said that the situation will further worsen unless the Reserve Bank of India takes appropriate steps to bail them out. “The bad is yet to be seen because the market is shrinking and liquidity crunch is increasing. Lending by NBFCs to MSMEs is yet to hit bottom,” Rajiv M Ranjan, Secretary, Association of NBFC P2P Platforms told Financial Express Online.

“The central bank will have to liberalise this and infuse funds by ensuring there is some bailout package. A major restructuring is required to be done similar to CSR and every bank has to be mandated a certain amount of money to be exposed to NBFCs lending,” added Ranjan.

Source: Moody’s Investors Service

The value of loan against property (LAP) assets managed by HFCs and NBFCs went up by only 8.3 per cent over the six months to December 2018 down from 15.4 per cent rise over the previous six months, Moody’s said in a note on Wednesday. NBFCs and HFCs cut LAP lending due to challenges in securing funding because of the liquidity crisis emerging from the default of IL&FS Group in September 2018. “We expect LAP delinquencies to continue to increase, because of higher refinancing risk and the muted operating environment for MSME borrowers,” the credit rating agency said.

NBFCs have tremendous pressure to build their books since the more they build their books the more they can get money to lend, according to Ranjan however following the IL&FS crisis there has been an erosion of confidence among banks to lend. “While the financial markets run on calculations and arithmetic but what overrides everything in the system is the confidence in the market. If that is broken no calculation works,” he said.

Also, what NBFCs did was they used to value let’s say a property of Rs 100 at Rs 300 and then they gave a loan of Rs 200. To comply from the RBI perspective, through this arrangement they show the risk exposure to be 66 per cent of the valuation of the property but actually it is 200 per cent of the real value of the property. This was a game played by the NBFCs and happened now because of the IL&FS crisis, according to Ranjan.

RBI, however, had reportedly said last month that there won’t be a bailout package for NBFCs even as it would ensure that no big NBFC collapse.

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