Wean banks off diet of big borrowers

Wean banks off diet of big borrowers

Why should NBFCs fund potential bank clients?

It is a sound move for State Bank of India (SBI) to acquire some Rs. 45,000 crore worth of non-banking financial company (NBFC) loans. It would alleviate NBFCs’ liquidity crunch in the short term and give SBI a sound portfolio (it is under no compulsion to take over any suspect loans) at an advantageous price. NBFCs are desperate for liquidity and in no position to bargain hard. Unless other banks, too, join the fray and bid up the price of the loans, SBI is likely to get the better class of loans on NBFC books at a decent price. If the sellers and buyers are both better off with the transaction, what more remains to be said on the subject?

Whether SBI takes over NBFC loans through outright purchase or by buying the bonds arising from pooling and securitising the loans, one question would emerge. If the loans are good enough to buy and hold, why could the banks not issue the loans in the first place? Why did it take NBFCs to originate these loans? In some kinds of loans, such as to buy land or to buy tractors or trucks or even used vehicles, NBFCs, with specialised knowledge, dedicated personnel and long-standing relationships built on proximate presence, have an advantage over banks. But what of loans to small enterprises? After all, when the SBI says that it would boost its priority sector lending via acquisition of NBFC loans, it has to refer to loans that banks are required to make. If an NBFC can assess the risk of making a type of loan, why not a bank? Banks have been loath to make the effort, is one answer: they do just fine, disbursing money to large clients, whose very names can justify the lending decision. Why bother with the risk assessment and monitoring of myriad small loans across personnel changes from transfers and postings, when big clients are waiting to save bankers the bother?

The very structure of banking must change, to allow small enterprises borrow from banks, rather than from NBFCs and informal sources. NBFCs must be confined to specific niches. The bond market and the banks must cater to the rest.