Removal of priority sector tag will push up interest costs for NBFCs

Ever since CRB Capital Markets fell in 2000, the regulators, rightly or otherwise, have been turning the screws on non-banking finance companies. Capital requirements were raised, leverage was restricted and regulatory oversight made more stringent.

While hordes of NBFCs withered away in this regime, some survived, and a few prospered. Topping the ‘prosper list' is Shriram Transport Finance Company, today the country's largest NBFC in terms of financial assets.

The company also recently completed a successful bond floatation, through which it raised Rs 1,000 crore — in contrast with a few other NBFCs whose infrastructure bond issues, straitjacketed by regulation, struggled to scrape through — stressing the point that issues relating to the market are best left to, well, the market.

Its Managing Director, Mr R. Sridhar, has seen easy and hard times and hence Business Line thought it fit to chronicle his views on the recent regulatory changes affecting NBFCs .

Excerpts from the interview:

Of the recent RBI regulations, which has impacted NBFCs the most?

Among the regulatory changes, the hike in capital adequacy ratio (CAR) to 15 per cent from 12 per cent is significant. This will impact the functioning of NBFCs as it will reduce their ability to leverage the extent of money flow to sectors.

The sectors we cater to are not financed by organised players. There is a huge requirement of funds from the small road transport operators' segment which is in the grip of the unorganised sector, paying exorbitant interest rates.

We have brought in institutional credit and, thereby, brought down interest rate from 40 per cent in used vehicles to 20 per cent today. We have cut interest cost by almost 50 per cent by bringing in institutional credit. Thereby, small road transport operators are able to access credit at better rates.

There is still a large requirement for capital in this segment.

We have been asking the regulator to reduce the risk weight on assets such as commercial vehicles from 100 per cent to 50 per cent, like what the housing sector is enjoying.

What about the removal of priority sector lending tag to NBFCs?

It is double whammy, coming after the hike in CAR. It will increase the cost for some big companies like ours but there will be no liquidity issues. Banks will continue to lend to us on non-priority basis on commercial rates.

With concessional rate no longer being available, the problem will be only on the interest cost front.

However, there are small- and medium-size companies that will face liquidity and interest cost issues. As these companies no longer enjoy priority sector lending, banks may take a stand that they would lend only if they have ‘AA' or ‘AA-plus' rating.

Isn't the RBI's move intended to make banks lend directly to the priority sector?

Yes, but the point is many banks have no capabilities to meet the credit needs of this segment for various reasons.

Some of them have used NBFCs to meet their priority sector target, on-balance sheet and off-balance sheet. Recently, the on-balance sheet has been removed so it's a direction given to banks, and not to us; in the process NBFCs may get impacted. This twin move will push the cost for small road transport operators.

Have NBFCs made representations to the RBI?

We have met the RBI and expressed our views and they have announced that a committee will look into it. Once it is constituted we would be making a representation on the impact of withdrawing the priority sector tag and why it should not be withdrawn. The committee will take a view and make recommendations to the RBI.

Are interest rate hikes affecting the sales of commercial vehicles, and are you witnessing a slowdown?

Yes, interest rate is a killer. Like other sectors of the economy that would be impacted by the interest rate hike, so would commercial vehicles. The commercial vehicle industry is cyclic, which comes down in a few years mainly due to excess capacity in the system; but this time round it is because of interest rate.

Truck owners borrow at a fixed interest rate that continues for five years. When interest rates move up, they take a ‘wait-and-watch' approach, for signs of interest rate moderation. They defer purchases. This year the commercial vehicle industry could be flat or witness moderate growth.

For moderate growth to happen, commercial vehicle manufacturers must introduce subventions. If all the stakeholders absorb the excess cost there could be moderate growth, which has been practised earlier. It also depends on the monsoon (in July-August). If the monsoon is good and agricultural production healthy, things could pick up from the third quarter.

Will delinquency go up due to interest rate hikes?

It would not affect the viability and payment schedule of the borrower as they take loans at a fixed rate. Delinquency will happen only when freight rates are under pressure. Interest rate hikes may dampen demand, but will not affect the repayment for the borrower.

Usually it is the demand for new vehicles that gets affected more than for used vehicles?

This slowdown will have a lag effect if interest rates continue to be high for the next six months. Truckers will defer buying used vehicles just as they would defer purchase of new vehicles. If there is a slowdown due to excess capacity, then we would not be impacted as used vehicles do not create additional capacity.

Is TPG, your long-term partner, looking to sell its stake to Japan-based Orix?

TPG is a partner to Shiram Transport and the Shriram Group. It is win-win relationship and there are long-term partners involved in various businesses. It is TPG's prerogative to decide whether to stay invested or exit.