June 01, 2023

The news that India’s largest bank, the SBI, was buying more than Rs 45000cr of “good quality” asset portfolio from NBFCs was treated by many skeptics as another instance of the government forcing a bank to bailout the financial sector in the wake the problems in IL&FS. But they forget one thing – the NBFCs are facing a huge liquidity crunch and SBI will get their good quality (obviously the bank will not pick up stressed assets) portfolio at a decent price. In this way, both will gain. The NBFCs will be able to meet their other commitments that can only be met by cash. The SBI will get a portfolio that will pay it good returns and will up its numbers on priority sector lending. This is a win-win situation for both.

The Economic Times has raised the question that if the loans are good to buy and hold, why did the banks not issue these loans in the first place? To answer this, the reach of NBFCs must be taken into account. NBFCs have spread to remote corners of the country. They seek – almost ferret out – borrowers as they are hungry for business. They are not like banks - waiting for people to apply. They can open up to 1000 branches without seeking RBI approval. They send their sales team to potential borrowers and win them over as clients. Further, with the RBI now approving new rules for co-origination of loans where both banks and NBFCs can jointly build a portfolio to lend and share the risks, banks can use their reach to their advantage. But ET has sensibly advised that banks should not go only after big borrowers and also lend to good small ones.

The only thing the SBI must keep in mind is the selection of the portfolio. In the past, LIC had burnt its fingers while buying after investing in IDBI Bank and ONGC after the HPCL buyout. If it manages to get a really good quality portfolio that improves its numbers in priority sector lending while giving it a good return without unnecessary risks, then it would kill two birds with one stone – get a good deal for itself and solve the liquidity crunch in the financial markets.