Lenders seek details on end-use of advances to non-banking finance companies.
Taking a cue from the global credit crisis, Indian banks have stepped up the monitoring of end-use of funds while lending to NBFCs, especially the ones which have heavy exposure in the retail segment.
The NBFCs are now required to produce a certificate from an independent auditor appointed by the bank to authenticate the purpose of the loans. The auditor is also required to keep a tab on the regular fund flow and report to the bank on a monthly basis.
“We do not require these measures for asset financing companies, but before lending to other NBFCs an authentic certificate is required to ensure that the money is being used for productive purposes and not deployed for speculative gains,” said Bank of India Executive Director BA Prabhakar.
These steps are significant particularly when public sector banks are emerging as the principal source of funds for these NBFCs.
All other fund source has dried up for these companies due to the financial crisis. Industry estimates indicate that nearly half of the NBFCs’ total borrowings used to come from the mutual funds (MFs). This has now stopped completely.
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According to another official of a public sector bank, the intensity of monitoring has gone up for the stressed sectors, because of the current scenario.
“Following the global crisis, the monitoring measures are being tightened and implemented with more intensity. Now even if an entity defaults on a single instalment, we follow up immediately as the possibility of defaults has increased,” Union Bank’s general manager for large companies, HS Upendra Kamath, said.
Another senior official of a mid-size public sector bank said the bank is examining NBFC loan books more closely. “We are going through the loan books of the NBFCs, just to get an idea about their exposure in different sectors. Similarly after disbursal, the entities would be required to produce fund reports on a quarterly basis,” he said.
The measures are also a result of apprehensions among bankers regarding the actual usage of funds by the NBFC sector as a whole, barring some asset financing ones. There has been a long standing view that NBFCs use their funds for speculative purposes by parking in the capital market.
Even a recent report by rating agency Crisil showed significant asset-liability mismatch in the balance sheets of NBFCs.
“More than 50 per cent of NBFCs’ borrowings have maturities of less than one year, while most of the assets have tenures of about three years,” the report said.