Asset Publisher


Author : Nachiket Naik, Head - Wholesale Lending
Posted On : Feb 15, 2021


NBFCs traditionally have occupied the space unaddressed by the Banks Bond Markets in India.
The approach of NBFCs traditionally has always been that of a money lender, primarily taking comfort in the collateral offered for the loan.
This automatically meant that the sponsors of the NBFCs were players who understood the value of the collateral and had the ability to liquidate the collateral to repay their loans.
The primary comfort though always was that if the collateral had a transparent market valuation and if the security was easily saleable, then the Borrower would be able to easily refinance the existing loan.


The above thesis of lending meant that asset classes like listed equity shares or completed residential / commercial property were most amenable as collateral for NBFC loans.
This was amenable to the borrowers as well who needed money at short notice, for flexible end use and with flexible repayment terms and were able to borrow from NBFCs against the above collateral.
This resulted in a few capital market intermediary owned NBFCs starting operations, given their comfort with the asset classes mentioned above.
In certain select cases manufacturers of specialized equipment used by corporates, also set up NBFC platforms to further their business, as the comfort with their manufactured equipment offered as collateral, meant a relatively easy realizability of their loan.


The last decade has seen the emergence of a new category of sponsors of NBFCs. Global Credit Funds desirous of participating in Indian credit found the NBFC as an appropriate platform, as against using the FPI route, given the various legal & regulatory benefits of an india incorporated platform.
The relatively easy availability of leverage from Banks Capital Markets to further fund these platforms and the implicit benefit of leverage in boosting RoEs and valuations, added to the benefit of choosing a NBFC vehicle.


Most of the collateral based lending themes are largely predicated on two aspects i.e. the collateral values continue to remain stable and the presence of an “always available” refinancing market.
This also meant that on the liability side NBFCs were themselves running ALM mismatches, with a view to reducing the cost of borrowing and boosting profitability.
Post the ILFS crisis, the fresh availability of leverage for NBFCs started drying up, thus predicating repayment of maturing liabilities on portfolio sales, given the inherent ALM mismatches on their balance sheet. However, given the relatively illiquid nature of a large part of the asset portfolio, sale of these loans was also challenging.
The asset quality of the portfolio also started deteriorating, as not only were the borrowers not able to repay their maturing loans to NBFCs, given the lack of a refinancing market, but the valuations of their businesses also started deteriorating, thus making asset / business sales difficult.
This perfect storm brought the sector to a grinding halt, thus affecting the credit quality of both NBFC borrowers as well as the NBFCs themselves.


As a financial intermediary, the asset strategy of a NBFC is a function of its liability strategy i.e. the nature of leverage availability dictates the nature of asset portfolio.
Given the learnings of the last year, NBFCs will want to run minimal ALM mismatches and consequently also focus on borrowers wherein the repayment of their loans is predicated on adequate free cash flow of the borrower.
This may mark a departure from the collateral backed, perpetually refinanceable lending strategy of the yester years. This lending strategy may now move to AIFs, who have a more “patient” liability side with no leverage.
Thus the NBFC lending strategy to corporates will start mirroring the approach of banks with a focus on building long term lending relationships with large business groups, being able to deliver credit in a quicker and flexible manner than banks and predicating risk on cash flow serviceability.
This will also lay the foundation of a fee based business vertical built around debt syndication, asset sell down, corporate finance advisory and asset management for the AIF businesses.