Any banker from Mumbai driving through the treelined thoroughfare from the Dum Dum airport to downtown Kolkata would believe that stress in the financial world is just restricted to a few kilometre radius of the business district at the Bandra-Kurla Complex in the financial capital.
It is that time of the year in Kolkata where the 5-day long celebration of Durga Puja makes it a carnival rivalling Rio. This year is no exception. Shopping is brisk and business plentiful in a region that had fallen off the economy heat map two decades ago.
But Kolkata’s Puja-season panache masks the misery unfolding beyond city limits, where struggling para-banks served, until last month, as the lifeline for thousands of tiny businesses that replaced giant industry, which had abandoned their first home in India to resettle elsewhere.
In West Bengal, retailers rely on the Pujas to sell everything — apparel, appliances to automobiles. But for saree seller Sahanaj Bibi of Baharampur, 200 kilometres north of Kolkata, 2018 does not promise much. She sought a Rs 50,000-loan just before the Pujas to make enough for the rest of the year. Securing funds has become a tough ask for Sahanaj Bibi.
“My saree sale just ahead of Durga Puja has taken a major hit as I could not mobilise the loan,” said Bibi. “I could not pay my suppliers fully. I had to borrow Rs 25,000 from family and friends to somehow manage the business. If I don’t get the loan next month, it will be a major crisis and embarrassment for me.”
Like her, Ritu Mallik of Balitikuri village in Howrah, and Asha Devi of Purnia in Bihar, are among thousands of small-business owners across India struggling to negotiate the disruption in their mundane lives. The answer lies in what is happening a couple of thousand kilometres away, in the financial districts of Mumbai.
The MSME sector contributes to nearly a third of the gross domestic product and also employs 111 million people, accounting for about 45% of manufacturing output and 40% of total exports, data from RBI shows.
Defaults by Infrastructure Leasing & Financial Services, and a sell-off in bonds of non-banking finance companies (NBFCs) led to a tightening of lending by banks and mutual funds. What was once a routine exercise — the rollover of loans — is now rare.
“We had disbursed Rs 192 crore in September. This month, we could so far disburse a mere Rs 100 crore as our lenders are not releasing funds,” said Kuldip Maity, managing director of Village Financial Services, a microfinance company with Rs 950 crore in outstanding gross loans. “Normally, all microfinance companies in Bengal front-load their disbursement for the month, ahead of Durga Puja holidays. We could not do it this time.”
Uttrayan Financial Services Managing Director Kartick Biswas said his company revised down its growth projections. “We were targeting Rs 300-crore business by end-March and have now revised that down to Rs 250 crore.” Uttrayan has a Rs 210-crore loan portfolio.
NBFCs TO THE RESCUE
Tiny businesses historically relied on informal finance as banks ignored them due to the lack of adequate financial history. In the past two decades, nimble NBFCs have helped thousands of entrepreneurs in the hinterland to build businesses and create jobs where formal employment remains a distant dream.
Entrepreneurs seeking to set up beauty parlours, restaurants or garages turned to NBFCs and NBFC-MFIs as their credit profiles would largely have been ignored by traditional banks.
NBFC credit in the overall system has risen to 17% by FY18, up from 13% five years ago. When banks were cutting cheques for giant power and road projects, NBFCs with easier fund access helped SMEs.
The aggregate balance sheet of 11,400 NBFCs was Rs 22 lakh crore at end-FY18. Borrowings rose 19%, leading to a drop in share capital and higher leverage, central bank data showed.
“The deep-rooted understanding of the local market — about assets, geographies and class of borrowers — and flexible operations helped NBFCs master the art of funding MSMEs that may not have any track record to prove credit worthiness,” said Raman Agarwal, chairman, FIDC, a selfregulator for NBFCs. “Bank lending to NBFCs, for onward lending to MSMEs, has boosted the growth of these businesses.”
Mutual funds, too, lent money to NBFCs. They found it more profitable to lend to NBFCs than to manufacturers as returns were higher. It suited NBFCs as raising retail funds costs more. Mutual funds could charge less than banks because of their low-cost model, especially in the past four years when liquidity was plenty and banks were reluctant to lend directly due to a four-fold jump in their bad loans.
“The industry is reducing exposure to NBFCs from a prudence point of view,” said Nilesh Shah, MD, Kotak Mutual Fund. “After IL&FS, there is concern among investors. There is also talk of a gradual reduction in NBFC sectoral cap for mutual funds by Sebi. Liquidity of NBFC paper has also reduced dramatically…It is driving MFs to reduce exposure to NBFCs.”
In good times, NBFCs were the king, borrowing funds from conventional sources to lend to SMEs. When triple A-rated IL&FS defaulted, everything turned topsyturvy overnight for NBFCs.
Mutual funds feared a surge in redemption demand, and became miserly. When NBFCs approached banks, they were also unwilling. Consequently, SMEs are facing a liquidity squeeze.
Ravi Todi, MD of Kolkata’s Shrachi Group, which has interests as diverse as in property and farm tools, said half of his borrowings came from NBFCs.
“They are unable to release funds against sanctioned limits… Both our real estate and agro machinery businesses have taken a hit as we are not able to make full payment to contractors. It’s an unhappy situation before Durga Puja. Our labourers on the ground are a worried lot,” said Todi.
Although only IL&FS has defaulted so far, concerns of a squeeze have led to a rise in lending rates for NBFCs. Indiabulls Housing Finance raised the floating reference rate for corporates by 200 basis points to 14.9%. The spread between G-Secs and an NBFC paper widened to 125-150 basis points for one-to-three-year maturities, compared with 75-90 bps a month earlier.
“Our borrowing cost has risen 50 basis points as we had to cough up higher rates on whatever little fund we have managed to mobilise since the crisis erupted,” says Todi.
In Mumbai’s financial districts, this is seen as a setback for a lending model anchored in short-term borrowing and long-term lending, creating what is called the asset-liability mismatch. But the repercussions are felt throughout India, far beyond Mumbai’s money hubs.
“A lot of NBFCs are not able to fund SMEs,” said Sanjaya Agarwal, MD and CEO, AU Small Finance Bank.
The squeeze could amplify the NPA problems. At present, bad loans of NBFCs are at 5.8%, down from 6.1% in FY17.
“We have postponed a Rs 30-40 crore contract…. because of the increase in rates and not getting funding on time,” said Chandrakant Salunke, founder of Macro group of companies, which is into packaging products. “Now, I cannot sign a contract.”
If banks and mutual funds do resume lending to NBFCs, it could be yet another ‘demonetisation’ moment for small businesses.
“Banking stress had allowed NBFCs to grow. But they should understand that they can’t lend long on short-term funds,” said Ashok Kumar Pradhan, managing director at United Bank of India. “If banks can now take back that space, a lot of discipline will return to the system.”