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The State Bank of India (SBI) has recently approached the Reserve Bank of India (RBI) with a proposal to limit the number of lenders that the non-banking financial companies (NBFCs) can borrow from.
Currently, a large number of NBFCs have a wide array of lenders, sometimes exceeding 50-60 in number, that SBI believes hampers effective monitoring of NBFCs' loan portfolios. According to sources, such an unrestricted huge volume of lenders makes it a bit challenging for banks like SBI to conduct thorough due diligence on NBFCs.
The concern arises due to the lack of communication and coordination among the various lenders to NBFCs, which inhibits their ability to assess the borrower's performance collectively. The fact is that while the non-performing assets (NPAs) of NBFCs have decreased, they still remain relatively high, indicating lingering risks. Also, the absence of regular data being reported from unlisted all the NBFCs poses challenges in identifying the potential stress points in the sector that further raises fears of systemic contagion akin to the IL&FS and DHFL crises.
In response to these challenges, SBI has proposed a formation of lender consortia to make a joint lending decision for all the large NBFCs. There is also a call for the establishment of a monitoring mechanism that will help to track the performance of all NBFCs in future. Though initiatives like SIDBI's growth accelerator program have aimed at bringing small NBFCs under the banking sector's purview, their effectiveness still remains limited due to lack of participation from major banks or strong regulatory support.
The RBI has taken many significant steps such as increasing the risk weights of bank loans to NBFCs, there is an agreement among the many stakeholders that more proactive measures are necessary to address the underlying concerns. The proposal from SBI emphasizes the urgency for more tight oversight and coordination within the NBFC sector to mitigate the systemic risks and ensure financial stability in the economy.
In conclusion, SBI's petition to the RBI highlights the urgency of addressing the long-standing difficulties in India's lending environment. It will need cooperation and dedication to build an NBFC industry that is more accountable, transparent, and resilient that would reduce systemic risks and guarantee the stability of India's financial system.
Thank you.
Regards,
Himangi Bharti,
Kautilya, IBS Mumbai.
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