Why sudden hoo-ha over Adani’s NBFC biz?

(Representative photo)
(Representative photo)

The clamour over Adani-SBI tie-up is a perfect example of missing the tree for the woods

The recent tie up between the State Bank of India (SBI), India’s largest public sector bank, and Adani Capital Private Limited, a financial service arm of the Ahmedabad-based conglomerate, has drawn attention of the activists for no reason.

The arguments revolve around why SBI chose Adani despite the bank having its own massive network and asset base.

A similar argument about the Adani group is also brewing hot and cold in Chhattisgarh. The arguments in India’s mineral rich state are also pushed by environmentalists who remain completely ill-informed about the subject. Probably, Adani bashing has become a norm for a handful.

So it is time to argue the SBI-Adani case on its merits.

For the uninitiated, a host of India’s public sector banks – not just SBI – are tying up with NBFCs. On the list is Punjab National Bank, Bank of India, Bank of Baroda and Central Bank of India. No one is questioning the deals they have signed, and no is questioning what those deals mean for the masses in India.

So it is important to explain this business of co-lending that refers to a combined effort of loans by NBFCs and the banks. In this case the banks take the majority, it is an 80:20 ratio with the NBFC partner.

The activists have no issues with all such tie ups, they just have a serious issue with the Adani group. No one knows why but such arguments surface every now and then. But it does.

For the record, SBI has signed a host of such agreements with ECL Finance, a subsidiary of Edelweiss Financial Services, Paisalo Digital, Save Microfinance and Vedica Credit. Other deals signed by India’s PSU banks include U GRO Capital, and MAS Financial Services.

And it is not the case with India’s PSU banks, private banks like Standard Chartered, IndusInd Bank and ICICI Bank have similar tie ups in place.

What do these tie ups mean? These are agreements which aim at co-lending to farmers for acquisition of farm equipment, including tractors. And such loans extend to other sectors also.

Several such tie ups have happened under the co-lending guidelines introduced by the Reserve Bank of India to cater to the underserved. It is aimed at financial inclusion of all, as targeted by Indira Gandhi when she nationalised commercial banks in late 1960s.

But consider the reaction of former Kerala finance minister Thomas Isaac who criticised the SBI-Adani Capital tie-up. Isaac tweeted: “SBI, 25000 branches and Rs 48 lakh crores assets, teaming up with Adani Capital, 63 branches and Rs 1292 crores assets, is bizarre. It seems to be a move to appease corporates who have not taken well (the) retreat from farm laws. Adani was making strong moves to control agri markets.

The reality: The Adani group invested heavily in silos for storage of food grain in a country where food grain storage is a major crisis zone.

The critics must remember that those enjoying easy access to the financial solutions in urban areas must realise the significance of co-lending models which ease the process of loans and bring easy finance to the doorsteps of the unserved. The SBI and Adani Capital – like other agreements – could become one of the proven models to deal with financial inclusion.

For the past few months, a host of PSU and private sector banks have tied up with NBFCs to cater to different segments of unserved consumers. This September, a host of PSU banks made a slew of announcements about their tie ups with NBFCs under the co-lending model.

SBI is actively looking at co-lending opportunities with multiple NBFCs and NBFC-MFIs for financing farm mechanisation, warehouse receipt finance, farmer producer organisations and for enhancing credit flow to double the farmers’ income.

For the record, Bank of India entered into a co-lending arrangement with MAS Financial Services for MSME loans on its 116th Foundation Day. In mid-September, IIFL Home Finance Ltd and Punjab National Bank (PNB) signed an agreement for co-lending into the housing sector. In July, Bank of Baroda had  partnered with non banking financier U GRO Capital for co-lending to the MSME sector.

The Reserve Bank of India (RBI) introduced the framework for co-lending models in September 2018 and made necessary amendments subsequently. This permitted banks to co-lend with all registered NBFCs (including HFCs) based on a prior agreement. The idea behind this initiative was to improve the flow of credit to the unserved and underserved sector of the economy. This is to ensure that the fund is made available to the ultimate beneficiary at an affordable cost and utilise the network of NBFCs to reach out to the priority sector consisting of retail, MSME and agriculture among others.

(Representative photo)

So why did the RBI introduce the framework?

India’s policy makers noted that NBFCs usually have low levels of NPAs for these activities whereas the banks have traditionally struggled with relatively higher NPAs historically.

What is important is that the wide network of NBFCs in India’s far-flung areas enables them to assess the financial needs of locals and, in turn, help the banks improve and increase their loan portfolio. Let us not forget that NBFCs must comply with necessary banking regulations for due diligence. They must have their KYC records in place, maintain high levels of servicing, recovery and other record keeping standards. 

Banks also have to adhere to the strict selection criteria. This is what SBI has published the following selection criteria on its website:–

Parameter Criteria
External Credit Rating A (-) and above (*)
Assets under Management Rs.100 Crore and above
Net worth Rs.10 Crore or more
TOL/NOF NBFC- Up to 8 Times
HFC – Up to 10 times
Gross NPA Less than 5%
Capital Adequacy ratio (CAR) NBFC-Min 15%
HFC- Min 14%
Default track record of NBFC with lenders Nil

SOURCE: https://sbi.co.in/documents/14463/22577/05042021_CO-LENDING++POLICY+DATED++04022021.pdf

Further, the non performing asset is recognised as per the RBI guidelines as applicable to respective co-lenders. Also, the loans under this model are under the ambit of the statutory audit as per the regulatory requirements. It is needless to say that Adani Capital is bound to follow the statutory requirements.

NBFCs not only provide the last mile connectivity with borrowers but also take the lead to introduce credit underwriting models to cater to the section underserved by PSU banks. This model works brilliantly, it provides further penetration to the banks without deputing additional resources at the cost of investors and depositors.

Actually, it is a win-win situation for both. Look at the reaction from the banks.

SBI said it is actively looking at co-lending opportunities with multiple NBFCs for financing farm mechanisation, warehouse receipt finance, farmer-producer organisations. The move, claimed SBI, will enhance credit flow to double the farmers’ income.

SBI is not alone in such efforts. On its foundation day, Bank of India Managing Director & CEO Atanu Kumar Das also stated that BOI will leverage the reach of NBFC to build an MSME portfolio. Similarly, Bank of Baroda executive director Vikramaditya Singh Khichi – while announcing the tie up with U GRO Capital – stressed on forging such partnerships, saying that it is the way forward and collaborative efforts leveraging individual entities’ expertise are of utmost importance to take co-lending to MSME segment to the next level.

Misplaced arguments often stop growth, the only way to life.

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