Reining-in NBFCs

Taking over an entity like IL&FS comes with its own set of challenges

Should Life Insurance Corporation (LIC), National Housing Bank (NHB)?or State Bank of India (SBI) bail out much-tainted Infrastructure Leasing & Financial Services (IL&FS) that piled up over Rs 91,000 crore in debt? Is it sustainable to pump good money into a bad company even if it holds some very ba?nkable assets? SBI’s decision to pump in Rs 45,000 crore as part of a rescue effort to buy up non-banking financial companies’ (NBFCs) loan portfolios is a case in point even if it perked up markets in one trading day. Similarly, NHB fishing for better assets or loans with NBFCs sets the tone for others to join in. For LIC to look at IL&FS assets is not a business opportunity but reflects its eagerness to trim possible losses it may accrue on the account. In effect, several top banks, insurers and players in the financial services industry are looking for opportunities in the NBFCs quagm?ire. Already, LIC was stuck with IDBI Bank though there was no reason why the insurer should be running a failed bank – unless it was a command perfo?rmance with orders coming from elsewhere.

Closing in on a lucrative business opportunity in times of crisis is not bad in intent or as a corporate strategy. But, will the managements of LIC, NHB or SBI be able to handle such opportunities that come with their own set of challenges. The possibility of mergers and acquisitions continues to hog the limelight at a time when IL&FS management headed by Uday Kotak is busy weighing the options to salvage the group. Keen interest in NBFC assets has only led to improved liquidity especially ahead of the October-February festive season when credit demand usually picks up with individuals and SMEs. Liquidity apart, it is important to know the strategy of sponsoring banks to deal with NBFCs. What could be the Reserve Bank of India’s (RBI) role in limiting the damage inflicted by IL&FS on NBFCs? Should government use taxpayers’ money to bail out badly run companies? Can a framework be evolved to prevent such failures in future? These questions need to be collectively addressed by all stakeholders.

The collapse of the financial behemoth Unit Trust of India (UTI) and the household investment instrument, US-64, that wiped out savings of several thousands of families in 2000-01 is a case in point. Small investors ended up poorer by losing Rs 20,000 crore parked in US-64. When the UTI Act and Sebi norms were being blatantly violated, and the management of the fund and investment decisions were being made on other than professional considerati?ons, the government of the day behaved like an ostrich with its head buried in the sand. A similar crisis may be staring in the face for IL&FS. The Serious Fra?uds Investigation Office (SFIO) can perhaps pinp?oint responsibility for such a decline.

Several NBFCs have reportedly violated RBI no?rms on limiting the lending to 50 per cent equity value of companies. The violation of this diktat seems to have led to the present crisis. NBFCs would have behaved more prudently had RBI aggressively discharged its responsibilities as a regulator and developer of this sector. Even if the finance ministry was unaware of the developments, why did the RBI remain silent thus far after having dished out norms governing NBFCs from time to time? IL&FS developments have no doubt hit equity markets and albeit indirectly, the banks and sponsoring financial institutions. Learning quick lessons, stemming the rot and reforming NBFCs are the way out.