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Economic Cycles Can’t Be Planned For And Certainly Not With A Black Swan Event Like The Global Pandemic

Author: Kumar Shankar Roy/Wednesday, April 15, 2020/Categories: The Finapolis Conversation

Economic Cycles Can’t Be Planned For And Certainly Not With A Black Swan Event Like The Global Pandemic

In India, the spread of the virus, announcement of a nationwide shutdown from March 25, social distancing measures, and fears among consumers and businesses, all escalated sharply over the past two weeks. High-frequency data, as well as anecdotal evidence, although still limited, suggest a significant contraction in economic activity. For the NBFC sector, which was slowly recovering the IL&FS default event, the COVID-19 outbreak has put a spanner in the works. Dislocation of the productive sectors by way of the closure of factories, migration of workers, etc., is a given, and so there will be a certain level of financial distress in the days to come for MSMEs / SMEs and corporates. Like the banks, the NBFCs will face second-order headwinds. Banks have become extremely risk-averse and so the various policy initiatives by RBI, including the sharp cut in repo rate, are not having the desired impact as yet. In this week’s Finapolis Conversation, Kumar Shankar Roy interviews Rakesh Kumar Bhutoria, CEO, Srei Infrastructure Finance, to talk about the NBFC sector and what can be done re-energize the NBFCs so that they can play a hugely supportive role to banks from a financial inclusion perspective. Read on…

How is the NBFC sector coping up with the economic slowdown? What is the solution to the problem?

NBFCs are part and parcel of the real world. We have a responsibility towards all our stakeholders and it’s a fine balancing act. In the COVID-19 scenario, all businesses across sectors (including NBFCs) are coming to grips with business continuity, safety and well being of their employees and customers, cash flow planning given the lockdown and strategizing for the coming quarters.

Economic slowdown for the next few quarters will be evident to all and NBFCs have to be prepared too with a rebalanced business model (including revalidating target segments, risk management practices, treasury operations whilst optimizing costs and human capital). This is a tall order and only the toughest management teams will eventually come out good.

Economic cycles can’t be planned for and certainly not with a black swan event like the global pandemic impacting every segment of the economy. It is worth noting that businesses that have a long-term purpose should not get flustered with short term mishaps completely outside their control. I am a diehard optimist and a firm believer in human ingenuity – we will come out stronger on the other side.

Interest rates have been cut. But economic recovery and revival is still elusive. Why are interest rate cuts not working the magic?

In certain western markets, interest rates are close to zero, but economic growth is still elusive. In our context, banks have become extremely risk-averse and so the policy initiatives by RBI is not having the desired impact as yet.

One trick that I believe we are missing is that the NBFC sector is seen with a certain level of suspicion and RBI’s policies are all bank-centric. If we can re-energize the NBFCs, they can play a hugely supportive role to banks from a financial inclusion perspective across the length and breadth of the country.

What is your take on the COVID-19 financial measures announced by Finance Minister so far? Are they enough to deal with the economic problems?

The policy measures in response to COVID-19 have been well-calibrated and the government has done well to prioritize the announcements, starting with welfare schemes and then following up with moratorium for loans, etc. I am reasonably certain that over the coming weeks more sectoral announcements can be expected. One such sector which touches all other sectors is indeed the NBFC space.  I believe that given the dislocation of the productive sectors (closure of factories, migration of workers, etc.), there will be a certain level of financial distress with respect to personal finances as well as for MSMEs / SMEs and corporates alike. Therefore, banks and NBFCs will face second-order headwinds.

RBI would do well to consider allowing a one-time restructuring of loans across the board without being tagged as NPLs (non-performing loans). This bold move can help revitalize the real economy in these exceptional circumstances.

Why is Srei Infrastructure Finance planning to stop financing Indian infrastructure projects after three decades in the business? What will be your business focus then?

Srei has been a market leader in asset-backed equipment financing serving the infrastructure space in a large measure. We continue to do so.

We also took corporate style lumpy exposures in the area of project financing to support nation-building. This has practically been discontinued for several years now given the lack of long term funding sources available in the Indian context, making it difficult to run a large book without taking undue risks.

The stock market has taken a negative view of Srei. In the last one year ended March 26, 2020, the Srei Infra stock lost 85% of the value. Why do you think this is happening?

In the current carnage, Nifty-50 stocks have taken a huge beating – sometimes down by 60-70 per cent from levels seen a month back. That’s the nature of stock markets. We have had our share of price fluctuations primarily given the bearish sentiments on the macros and on the NBFC sector as well after the IL&FS meltdown.

From an NBFC industry point of view, we understand that Srei Infra has sought a one-year blanket moratorium on debt repayment for the industry. What will this achieve?

Given the COVID-19 related uncertainties on the economy, it is our belief that a one-year leeway across the board will help revive sentiments and will be equitable for all segments of the economy and finally will be easy to implement.

Would you say that post the IL&FS crisis, the world has changed for NBFCs. Funding access is key now. What happens to NBFCs who don't have capital access?

IL&FS was one of a kind business model – most NBFCs are not in the same bracket. However, in common parlance, NBFCs are nowadays considered high risk by banks. This is unfortunate given the relevance of NBFCs in catering to segments that would otherwise not have access to bank funds.

NBFCs are regulated by RBI and in some ways ahead of the curve compared to banks. For example, banks in India are yet to implement IND AS accounting standards whereas large NBFCs like Srei have already done so as per regulatory requirements.

If a particular NBFC has limited access to capital, then it will not be able to grow beyond a point and at some stage may get consolidated with another NBFC or a bank.

I don’t recall your company ever venturing into the retail segment of NBFC lending. In hindsight, will you say that focussing on institutions rather than retail was a missed opportunity? Do you plan to enter retail finance in any way?

We are amongst the largest players in the financing of productive assets. In this context, retail refers to small businesses with one or two assets. We are very active in this space. If by retail, your reference is to individual loans, that’s not our target segment.

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