Liquidity problems at Dewan Housing Finance Corporation Ltd (DHFL) and its reported failure this week to pay coupons highlight the funding challenges faced by India's non-banking finance sector, Fitch Ratings says.
"Issues in the non-banking financial companies (NBFCs) were already known to the market but DHFL became a focus point after the failure of Infrastructure Leasing & Financial Services Ltd (IL&FS) in September 2018," the ratings agency says, adding, "This also contributed to a sector-wide liquidity squeeze as investors became more risk averse. Indian NBFCs' liquidity is sensitive to market sentiment as their business models rely on short-term wholesale funding, which can dry up fast if market sentiment turns negative. Funding models of housing finance companies and NBFC loan companies, which have become increasingly reliant on short-term funding to fund longer-term assets, have been particularly affected by the liquidity squeeze."
According to the ratings agency, the liquidity pressures in NBFCs are in stark contrast to the banking sector, which has not faced significant liquidity pressure or deposit withdrawals, despite asset-quality and capital adequacy weaknesses.
The sector pressures have led India's top NBFCs to explore other sources of funding and to start positioning themselves to tap the US dollar bond market. "We expect Indian NBFIs to become more regular issuers in the offshore bond market as they seek to diversify their funding sources. If prudently managed, this should be credit positive as funding profiles are strengthened," Fitch says.
The funding squeeze has contributed to higher funding costs and a slowdown in loan growth for India's NBFC sector. NBFCs are an important channel for extending credit to the wider economy, given their extensive distribution networks, which are often more far-reaching across rural India than those of banks. The sector's role as a credit-provider became outsized as the Indian banking system was forced to deal with its weak asset quality.
Banks, particularly public sector banks (PSBs), were undercapitalised and had limited capacity to lend more. NBFCs now account for nearly 20% of credit to the economy compared with about 15% five years ago.
Indian NBFCs fast loan growth in an environment of relatively benign interest rates was increasingly funded by short-term funding, in particular, commercial paper issued to the mutual fund sector. The banking system also is an important source of funding for NBFCs, driven in part by the regulatory push for banks to provide 'priority lending', with NBFCs being an important conduit for this.
Fitch says, "Both of these funding sources for NBFCs have become more risk-averse, which means that the sector is likely to face higher funding costs and a period of deleveraging, although the better-positioned NBFCs should still be able to achieve loan growth. The sector's reliance on short-term funding has reduced since late 2018 and some stronger NBFCs have shifted towards longer-term funding, such as term loans or negotiable certificates of deposit."
"We expect credit growth in India to remain slow, despite this week's interest-rate cut, as most banks are capital-constrained and NBFIs face tighter funding conditions," the ratings agency concluded.
HDFC Bank has dropped the firm of S.R. Batliboi from its panel of auditors following the Reserve Bank of India's (RBI) refusal to approve the appointment and has, instead, appointed MSKA and Associates as their Statutory Auditors, the bank said on Friday.
HDFC Bank said in a stock exchange filing that it has appointed MSKA and Associates for a period of four years with effect from the financial year 2019-20, subject to the approval of the RBI and company shareholders.
"The Board of Directors of the Bank had at their meeting held on March 7, 2019, resolved to re-appoint S.R. Batliboi and Co, LLP as the Statutory Auditor of the Bank for a period of three years with effect from FY 2019-20, subject to the approval of the Reserve Bank of India and the shareholders," it said.
"Subsequently, the RBI in terms of its Enforcement Action Framework had decided not to approve S.R.B. for carrying out statutory audit assignments in commercial banks for one year starting from April 1, 2019, on account of lapses identified in a statutory audit assignment carried out by S.R.B.
"Accordingly, the Bank cannot appoint S.R.B as the Statutory Auditor of the Bank as was earlier proposed, the Bank informed," the filing added.
Earlier this month, the RBI barred auditor S.R. Batliboi from handling bank audits in fiscal 2019-20. S.R. Batliboi is an affiliate of EY, one of the big four audit firms in India. The company had audited accounts of the financiall beleagured IL&FS.
Besides, the firm is also the auditor of Interglobe Aviation, the owner of India's largest airline IndiGo, South Indian Bank and Aavas Financiers.
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
For the first time ever, a government investigator has had the courage to call out to the Reserve Bank of India’s (RBI) weak supervision. The Serious Frauds Investigation Office (SFIO) has blamed RBI for its failure to detect what turned into a massive systemic scandal at Infrastructure Leasing & Financial Services (IL&FS).
The financial sector continues to reel from the repercussion of the IL&FS failure, what with Dewan Housing Finance Ltd (DHFL), finally, defaulting on its interest payment on bonds and the consequent downgrade decimating net asset values (NAVs) of a slew of debt mutual fund schemes. The deleterious impact of IL&FS’s failure even extends to pension fund investments by several private companies.
In the past three decades or more, this is the first time that RBI has been seriously questioned for its lapses even though the damage inflicted on our financial system, because of its repeated failures as a regulator, have been huge. Way back in 1992, the securities scam was primarily about the way RBI ran the government securities (G-Sec) market and failed to upgrade turgid systems and manual processes for trading in government securities.
A decade later, RBI was sleeping at the wheel during the Ketan Parekh scam as well. Every entity that colluded with Ketan Parekh and other scam accused had set up overseas corporate bodies (OCBs) in tax havens with $10 capital and were using them to pump money into the Indian capital market. RBI was blissfully unaware, mainly because it does not ever seek market feedback or engage with stakeholders.
And, yet, every time a major financial scandal erupts, RBI quickly gets into high gear and begins to hand out punishments and penalties. Nobody has questioned how it goes about doing that either.
So here are some interesting aspects to SFIO’s action.
The SFIO charge-sheet filed in the IL&FS Financial Services (IFIN) case says, “Action at the right time may have prevented ballooning of the matter… RBI had repeatedly pointed out non-compliance with group exposure norms and wrong calculation of net owned funds (NOFs) in inspection reports from 2015 onwards. But no penalties were imposed and IFIN was allowed to continue operations without corrective measures. It is only in 2017 that RBI even bothered to increase the pressure and seek classification of group companies to arrive at net owned funds.”
Interestingly, SFIO has attached RBI’s inspection report to the detailed 800+ page charge-sheet filed against IL&FS Financial Services (IFIN) last week. For transparency activists, this is a breakthrough development, since RBI continues to defy Supreme Court’s orders and has flatly refused to provide inspection reports. This time, it is partly in the public domain.
Although SFIO has drawn attention to RBI’s failure, its actions seem tentative. It has merely asked RBI to probe officials in the department supervising non-banking financial companies (NBFCs) for not having acted against IFIN, although major discrepancies were noted in its books as early as 2014. It also asked RBI “to take appropriate action and also initiate suitable policy measures to prevent such fraudulent actions.”
This is like the Securities & Exchange Board of India (SEBI) repeatedly asking the National Stock Exchange (NSE) to appoint its own forensic auditors and conduct investigations in the algo-trading, or co-location scandal. The outcome, not surprisingly, was a weak and wishy-washy report, which SEBI tried to cover up with a biggish penalty.
Will the outcome of SFIO’s directive be any different? Well, see for yourself. Over a month ago Moneylife filed an RTI application asking RBI for the names and designation of officials responsible for monitoring and inspection of IL&FS, action taken against them, if any, as well as a record of any discussion or meeting since July 2018 with regard to the failure of this systemically important shadow bank.
RBI responded by asking us to direct the query to its regional office and the department of non-banking supervision (DNBS) – as if to suggest that the top brass has not even taken cognisance of its own failure in this debacle.
We filed a second RTI application with the DNBS only to get another rejection. RBI refused information under Section 8(i)(j). Under this clause, it can refuse to part with information unless the matter pertains to an issue of larger public interest to justify the disclosure.
Apparently, RBI’s public information officials (PIOs) are still not aware that there is a larger public interest involved, although major infrastructure projects are at a standstill and the entire financial sector is reeling under the impact of IL&FS’s defaults. If that weren’t enough, the information was denied under Section 8(i)(h), which permits denial if the information “would impede the process of investigation.”
When Moneylife filed a first appeal, the matter turned into a farce. The appellate official now chose to deny information under Section 8(i)(g) of the Act, which justifies denial of the names of inspecting officials if it is likely to “endanger the life or physical safety of any person.”
However, the PIO has been asked to reconsider the earlier denial on the ground that it would impede investigation.
I suspect there is another reason why RBI is stonewalling us about information on its failure to rein-in IL&FS. And that is because protection for IL&FS came all the way from the top. Remember a former governor as well as the IL&FS board ignored persistent letters from a whistleblower. This included pseudonymous ones as well as those from known sources and foreign institutional investors.
In December 2018, I wrote about The Destructive Impact of RBI’s failure to Act in the case of New Tirupur Area Development Corporation (NTADCL), where RBI mysteriously and brazenly buried repeated pleas by AIDQUA Holdings (Mauritius), Inc (AIDQUA), a global investment fund which has a 27.89% shareholding in NTADCL.
AIDQUA’s letters in 2013-14 were addressed to an RBI executive director and RBI’s refusal to intervene is also documented. Had it looked at the forensic audit, IL&FS’s dubious method of working and egregious flouting of rules would have been exposed long before its actions led to a collapse. NATDL continues to operate with the same management and without a proper managing director.
As is the case after every major scam or sting operation, RBI begins to investigate after the damage is done and responds with bans and penalties. After the SFIO filed an 840-page charge-sheet, RBI has threatened to cancel IFIN’s licence to operate as a non-banking finance company (NBFC). It has also barred SR Batliboi & Company (associate of Ernst & Young) from handling audits of commercial banks for just one year, starting 1st April.
It is important to note that the only stakeholder entity that RBI engages with is the Indian Banks Association (IBA), which is an unregistered, voluntary association of banks, with doubtful legal standing. Yet, RBI empowers it to take all decisions pertaining to banks, right from deciding service charges for depositors, to negotiating wages and now, even appointing forensic auditors to banks.
This time, however, an accounting firm from Chennai has written to the finance ministry and the RBI governor, among others, to record its objection. It says, “IBA, being an unregistered, unauthorised body, has neither any responsibility, nor any accountability, considering the fact that it is not a body formed under RBI, to be conducting empanelment of firms for the purpose of forensic audit.” In fact, being unregistered, IBA does not even have to follow Central Vigilance Commission’s guidelines of ensuring a level playing field. Will the government or RBI respond? We will be watching the developments.
Unfortunately, as long as the RBI governor’s job remains a much desired posting for our secretaries, nothing will change and the country will keep paying for the regulator’s repeated failures to supervise and stop the corrupt nexus between banks and big business leading to systemic failures and massive defaults that cost India a few lakh crore of rupees every few years.