NBFCs need access to credit history like banks, says Gunit Chadha

NBFCs don't have an equivalent body to represent their well-filtered voice with the regulators and government, says APAC Financial Services founder

Two years since setting up shop, APAC Financial Services is considered a non-banking financial company to watch. One of a clutch of niche NBFCs started by former bankers, it wants to be a key player in the micro, small and medium enterprises segment. Founder GUNIT CHADHA, former chief executive officer of Deutsche Bank (Asia-Pacific), spoke to Raghu Mohan on the road ahead. Edited excerpts:

How do you see the post-moratorium stress situation?

The moratorium acted as a cushion to borrowers, providing them interim relief, but it was never going to be a long-term solution. Follow-on initiatives like the Emergency Line of Credit provided relief to eligible borrowers. The moratorium helped in dampening cash outflows from borrowers, but what about cash inflows? This calls for consumption, investment spending and jobs to come back where I do see green shoots. However, lenders (and rating agencies) must differentiate between loans to borrowers facing “tactical stress” (like retailers, which were temporarily shut during Covid, which would need short-term cash-flow re-balancing) versus restructuring loans to borrowers facing “strategic” issues.

Your view on the treatment to be accorded to the servicing of interest on loans, going ahead?

From first principles of accounting, it’s only fair that borrowers service interest with respect to the moratorium period — no interest waivers. What I understand from the field is that borrowers from rural and semi-urban areas and young borrowers are demonstrating greater consciousness of maintaining a good credit score.

The central bank’s recast circular does not cover loans and credit substitutes availed of by NBFCs from banks, though the former are expected to offer a recast to their clients. How is one to square this?

The recast facility is aimed at providing relief to eligible customers, who faced significant difficulties due to the pandemic. However, NBFCs backed by their institutionalised structure and operating metrics are much better equipped to handle the situation, compared to individuals, or micro, small and medium enterprises. The Reserve Bank of India did provide alternate mechanisms to NBFCs, like the Long-term Repo Operations, and support on securitisation, etc, which were well utilised by the larger NBFCs. Large NBFCs apart, it’s the smaller NBFCs and fintechs which need more liquidity support in these times.

Who is to supply liquidity to NBFCs, going ahead? Is there a case for allowing the better-rated NBFCs to raise deposits, subject to the ceiling of Rs 5 lakh per account — in line with the deposit insurance cover, with some caps?

I think large NBFCs are comfortable today. Many of them even have a deposit-taking licence which is being used. With the entry of small finance banks, it’s not going to be easy for the newer NBFCs to raise deposits, even with a better rating. The solution has to be in the form of a better bond market.

On an ancillary topic, NBFCs’ voice needs better representation. Having been a member of the managing committee of the Indian Banks’ Association for more than a decade, I am most surprised that NBFCs don’t have an equivalent body to represent their well-filtered voice with the regulators and government. In fact, some of the gaps which exist between banks and NBFCs need to be closed. For example, why can’t NBFCs access borrower credit history from the Central Repository of Information on Large Credits? Why are non-systemically important NBFCs denied access to debt recovery tribunals for unsecured loans, while systemically important NBFCs can do so? Or, [why do] banks pay lower interest rates on fixed deposits (FDs) from NBFCs than on FDs from corporates, due to a regulatory norm in the liquidity coverage ratio framework? I would suggest parity of information and access to tools across all stakeholders.

To the extent there will be a flight to quality, how are tier-2 NBFCs going to raise capital?

The ability to raise capital will strongly hinge on scalability, unit profitability metrics and, above all, governance standards. It’s the last which has been the nightmare of many equity investors, among both large and small NBFCs and a few banks. Building assets for its own sake may have historically worked as a mantra — of big being beautiful — but events have proven it to be a nightmare on capital misallocation and asset-liability management. Well-governed NBFCs with granular loan portfolios and strong risk management will continue to attract capital.

How is APAC Financial looking at the current situation for its businesses and fund-raising?

We have strong governance and, ESG apart, profitability has been the mantra right from inception. We are now pursuing growth, focussed squarely on lending to MSMEs which provide a hugely scalable and sustainably profitable opportunity. We have added several branches and a digital footprint in the past two months to reach out to the under-banked in semi-urban and rural locations. We are not distracted in chasing multiple businesses. Simply, “think MSME, think APAC.” Raising capital is not a constraint. Building a ground-up granular well-managed business model is where we are focussed.