Reserve
Bank of India is ready with its draft policy guidelines
on NBFCs and they could have interesting and material
changes for both NBFCs and for the banking sector, say
Bhaskar Ghose, MD of IndusInd Bank and Jayprakash Sinha,
head of research and director at Ambit Capital.
According
to Bhaskar Ghose, the guidelines will cool down the overheated
sectors. Jayprakash Sinha expects these guideline to affect
smaller NBFCs more. According to Sinha, most large NBFCs
are equipped to embrace the new guidelines. He also states
that the guidelines would impact the cost of funds of
the NBFC stocks.
CNBC-TV18
shares with domain-b its interviews with
Ghose and Sinha:
Just
start to put the only listed instance in perspective of
Cholamandalam and DBS. What will happen with these new
recommendations?
Sinha: You have to understand that they have mentioned
that the foreign banks who are looking to enter in this
space, have already taken 37.5 per cent. At this point
in time, we don't see anything going back on that.
This
fairly restricts that wherever you have got automatic
approval, you should not embark beyond those 19 activities,
which are being allowed to you at this point in time.
What our understanding of Chola-DBS is they are fairly
restricting within that limit. So it is not going to impact
much. But it will impact the refinancing or borrowing
from the banks.
If
you look at the space, they have almost borrowed around
10% of their entire liabilities from the banking segment.
So that will be little costlier at this point in time.
So cost of overall funds may increase from the current
level.
A
lot of people have been saying that this could have many
positive rub offs for the banking sector, do you agree?
Ghose: Absolutely. I will talk about a few. First
and foremost, since it restricts NBFCs from lending as
freely as they have done for a number of reasons, a lot
of the credit demand will now move now on to banks and
obviously that is good news for banks.
Banks
will be able to re-price with the demand remaining roughly
the same, the supply being cut down of supply of finance
to sectors like capital markets, to sectors like housing,
to sectors like automobile financing.
Certainly,
it is good news for banks because demand being the same,
supply sources being cut down, it simply means that banks
can now re-price many of their loans to any bank, which
is very heavy into the retail sector. It is good news
for us because certainly the yields on our retail loans
will go up.
In
fact, as a consequence with bank finance moving out of
the corporate sector to some extent again, the supply
to the corporate sector will come down. Hence I hope that
we will be able to re-price some of our corporate loans
as well.
The
one thing that is likely to be affected though is flow
of funds to the capital market especially on the retail
side. There are restrictions on how a bank can lend margins
of 2:1, banks cannot lend more than Rs20 lakh to a single
individual borrower. There is a 40 per cent cap on total
bank exposure to the capital market of its net worth.
These
were restrictions, which were not applicable to NBFCs,
by and large. This will have an impact of restricting
flow of funds to the capital markets sector in terms of
financing retail players in the capital markets. And again,
it is good news for us because it simply means that rate
of interest on some of these loans will go up.
Do
you expect to see an impact on capital flow? Do you expect
NBFCs and their funding cost to go up or get more complicated
for them?
Sinha: Yes, it will be more complicated from the
current status because you are restricting them on the
public deposits side. Also, you are restricting them from
taking bank loans, both directly as well as indirectly.
So it will create restrictions from the free sourcing
of funds at this point in time. To that extent, the cost
of overall fund is likely to go up.
Just
one word on IndusInd bank, because you have been quite
keen to launch PMS services. Will you indeed go ahead
and do that now?
Ghose: That is further good news. All this time,
as you are aware, we were not allowed to offer PMS (portfolio
management services), or even if we did manage to get
our hands on NBFCs, it would have been a bank sponsored
NBFC. Therefore there would have been restrictions on
what we could do with discretionary portfolio management
services.
Now
the RBI has made it quite clear that for bank sponsored
NBFCs, they are prepared to consider requests for discretionary
PMS on a case-by-case basis. So this is certainly very
good news for us.
It's
not so good news for banks, that already have NBFCs, which
were using these, in a sense, to get around exposure limits
on single borrowers or groups of borrowers spreading it
out between themselves and their NBFC's subsidiaries.
But for banks such as ourselves, which were not using
this route, these recent draft guidelines is excellent
news indeed.
Do
you think there could be a bit of a problem with the financing
of large IPOs, like DLF and Cairn, which are coming up
because of what the Reserve Bank is saying right now?
Will banks be able to make up the shortfall of the kind
of money, which might go through from the NBFC towards
such funding?
Ghose: In any case, we see these guidelines as
a means that the RBI has used to cool down some of the
overheated sectors of the economy. These NBFC guidelines
will certainly have that impact.
As
far as IPO funding is concerned, that is something that
RBI has had its eye on for sometime. And to some extent,
yes, banks will step in and fill in the gap left by NBFCs
and so on. But as I mentioned, there are restrictions
on what a bank can do in respect of individual funding
and retail funding.
These
were restrictions, which were not applicable to NBFCs.
In respect of the Rs20 lakh limit in respect of the extent
of margin funding, overall although the banks will take
up some of the slack, overall there might be an impact
on IPO funding, which for us will translate into probably
higher rates of interest on such loans.
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