Annual inspections by the Reserve Bank of India (RBI) has commenced for banks. With FY23 financials under the scanner, what’s grabbing the regulator’s attention is the loans handed out by banks to non-banking finance companies (NBFCs).
With the share of bank loans to NBFCs as a percentage of loan book increasing to 13-16 per cent for the top 20 players — a jump of 200-250 basis points — the RBI is ascertaining the implication of these loans to the balance sheets of banks from an asset quality perspective.
Higher provisioning
To put things into context, loans to NBFCs are categories as ‘secured’ by banks as they are often backed by liquid collaterals, including receivables.
However, with the growing proportion of NBFCs, particularly those operating in the non-housing segment such as business loans and personal loans which are often unsecured, there is a debate between banks and the regulator on how these loans should be treated.
If unconvinced by the merits put forth by banks, the regulator may insist that banks take contingent provisioning against loans lent to NBFC borrowers. “The question is whether such a provisioning would be insisted on FY23 financials or banks will get some breather to implement higher provisioning in the ongoing FY24 fiscal,” said a person aware of the matter.
Secured or not?
Are loans to NBFCs really secured — that’s the debate doing the rounds, according to highly placed sources.
“For banks, these could be secured loans, but the end-use of these loans goes into building unsecured books. In that case, even if loans to NBFCs are backed by hard collateral, they may not be recoverable in practice. This is the concern for RBI,” said a person aware of the matter.
Bankers say this debate has been ongoing for a while, but the magnitude it has taken in FY23 annual inspection has taken them by surprise. “It’s in early stages of talks and in a quarter or so, the outcome will be known,” said the person.
