The largest bank in the country, the State Bank of India (SBI), has bought a paltry Rs 500 crore of pooled assets portfolio of non banking finance companies (NBFCs) and housing finance companies (HFCs) in the first half of 2019-20 under the government's one time six months' partial credit guarantee scheme. The story is similar for other PSBs though no official figures are available.
This clearly shows a lack of appetite amongst PSBs to buy pooled assets where the government had taken the initiative to provide a first loss of cover to buy assets up to Rs 1 lakh crore. The idea was to support the NBFCs in these difficult times.
The poor response from PSBs is partly because of higher existing exposure to NBFCs via lending, issues with NBFCs portfolio quality because of job losses, and stagnant income levels. In fact, the balance sheet of PSBs is also not in good shape because of stressed loans. Some PSBs are also under the RBI's prompt corrective action (PCA) as weak banks, which further restrict their resources to buy such assets.
The pooled assets scheme that was announced in the Union Budget 2019-20 proposed to cover the first loss of up to 10 per cent (Rs 10,000 crore) for buying a maximum of Rs 1 lakh pooled assets of good rated NBFCs in the current year 2019-20. This first loss coverage scheme was extended only to PSBs.
The low interest shown by the PSBs have recently forced the government to cover even the lower rated asset pools of NBFCs now. Last week, the government brought down the minimum rating threshold for pooled assets from AA to BBB plus.
The scheme also covers NBFCs and HFCs that have slipped into SME-0 category during the one year period prior to August 2018. The SMA (or special mention account) is a stressed account where the principal and interest is not overdue for more than 30 days. This actually increases the risk for the PSBs.
Partly, the reason for lacklustre response could also be a demand issue as good NBFCs with high rating have many other options to raise resources rather than part with their good retail assets with banks. The ones that needed liquidity via this report route were left out because of lower credit rating.
As the NBFCs are still struggling , the government has now extended a helping hand to the struggling Rs 30 lakh crore NBFC sector which saw asset liability mismatches post the debacle of infrastructure financing institution IL&FS. Dewan Housing Finance Ltd (DHFL) is already facing bankruptcy. The NBFC sector is still reeling under problems. Raghuram Rajan, the former RBI Governor, had recently suggested an asset quality review of NBFCs that have exposure to real estate, construction and infrastructure. Arvind Subramanian, the former chief economic advisor, had also suggested a similar asset quality review to clean up the books of NBFCs.
The NBFCs and HFCs play a big role in supporting consumption as many borrowers not served by the banking industry get money from these non bank entities.
A pool of assets is actually a securitisation of loan portfolio. A pool of assets (say home loan of a particular size or geography) are sold by a NBFC / HDFC to banks in return of upfront payment. The NBFC gets the much needed funds and the bank gets the interest paying assets. These deals are also structured in a way where NBFC/HFC also takes part with 5-10 per cent share in the securitised portfolio, which provides comfort to the buying bank.
The government is encouraging banks to buy pool assets by covering their first loss.
But there are also risks. In a slowing economy, job losses and stagnant incomes, there are chances of possible stress in the retail portfolio which was built in good times by NBFCs. The pooled assets, though rated by rating agencies can have issues in future. There are many who question the credibility of rating agencies. IL&FS, DHFL etc all had good rating from rating agencies before they went bust. Similarly, it is difficult to predict the future behaviour of a pool of assets when the economy is sliding every quarter.