RBI’s priority lending fiat to hit NBFCs

Asset-finance non-banking finance companies (NBFCs) are expected to be impacted if the Reserve Bank of India’s (RBI) proposed guidelines on priority sector lending come into effect.

The draft guidelines of the committee led by MV Nair were released late on Tuesday.

Two recommendations that are seen hurting asset finance NBFCs the most are a 5% cap on bank loans to all NBFCs for on-lending — on which banks are allowed to take priority sector lending benefit — and a 6% cap on interest spread under priority sector lending for asset-finance NBFCs.

Shriram Transport Finance Co is seen getting hurt the most.

“Asset-finance NBFCs like Shriram Transport will be adversely impacted if the committee’s suggestions are accepted, given the various caps suggested on bank funding which would qualify as priority sector. For housing finance companies, the suggestions are a modest negative,” Mihir Sheth, Anil Agarwal, Subramanian Iyer and Reshma Seth of Morgan Stanley wrote in a note dated February 22.

The Morgan Stanley analysts noted that Shriram Transport Finance accesses two-thirds of its total funding from the banking system (25-30% via bank on-lending and 35-40% via assignments/securitisation).

If these proposed recommendations, along with earlier drafts from the RBI on minimum holding period and no credit enhancement and Usha Thorat Committee’s recommendations on capital and non-performing loans recognition norms, were to be accepted and implemented, then Shriram Transport Finance Co’s earnings could be hit by 6-7%, Rajeev Varma and Veekesh Gandhi of Bank of America Merrill Lynch wrote in a report dated February 21.

“Among the NBFCs, we think Shriram Transport Finance may potentially get impacted, as 40% of its AUM is through securitisation. This may need to be lowered to 35%; though we still await clarity on this. Moreover, many of the leading private banks (having NBFC exposure at >5%) are likely to only lend at market rates,” wrote Varma and Gandhi.

Umesh Revankar, deputy managing director, Shriram Transport Finance Co concurred with the analysts. “There are two things which are going to impact us — the 5% cap on bank lending to NBFCs and the overall limit of 6% on spreads, or the difference between the rate at which we borrow funds from banks and the rate at which we lend. The first will restrict credit flow to NBFCs and the second will impact us because our spreads are higher than 6%.”

Revankar said the NBFCs will appeal to the RBI on the two issues.

Among others, Mahindra and Mahindra Financial Services is also likely to be impacted.

According to a report by Siddharth Teli, Ishank Kumar and Nikhil Rungta of Religare Institutional Research, as on December 31, the company’s securitised portfolio comprised 10% of its total assets under management. As per their interaction with the management, the portfolio primarily includes tractors, for which the spreads would have been significantly higher than 6%. These could come under pressure if the draft guidelines were to be implemented, the three analysts wrote in a report dated February 22.

Officials of Mahindra and Mahindra Financial Services could not be reached for a comment.