Specialist in Indian Banking and Economic Research

Hemindra Hazari

Thematic (Sector/Industry)

A newly-appointed (on October 9, 2020) deputy governor of the Reserve Bank of India (RBI) has <a href="https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1101" target="_blank" rel="noopener">proposed</a>, for discussion, that large systemically-important non-bank finance companies (NBFCs) either convert themselves into banks, or that they contract assets, in order to protect financial stability. This proposal not only has major implications for prominent NBFCs some belonging to industrial houses, but also highlights the regulator’s present lack of capability to regulate such companies. Instead of arguing for the large NBFCs to either become banks or face an eventual demise by setting on a path to shrinking their size, the regulator should be examining how to improve its own regulation and supervision of large NBFCs. The collapses of IL&amp;FS (<a href="https://hemindrahazari.com/2019/01/31/ilfs-collapse-what-happens-when-infrastructure-development-is-privatised-hemindra-hazari/" target="_blank" rel="noopener">here</a>) and <a href="https://www.smartkarma.com/entities/dewan-housing-finance-corp" target="_blank" data-smartkarma-citation="entities:8142:1" rel="noopener">Dewan Housing Finance (DEWH IN)</a> (<a href="https://hemindrahazari.com/2019/01/29/panel-discussion-on-cobrapost-expose-of-dhfl/" target="_blank" rel="noopener">here</a>) were not only a failure of corporate governance and the economic slowdown, but also the consequence of a severe shortfall in regulatory supervision.Financial deregulation and the entry of more players in the strategic financial sector require a more vigilant, intrusive regulator armed with the necessary systems, processes and human resource talent to effectively regulate and supervise the sector. Sadly, the total officer strength of the RBI is currently below the levels of 2015, and it needs to invest in more resources for regulating the NBFC sector instead of proposing to compel large NBFCs to become banks. NBFCs cater to specific needs of the economy which the banks, for whatever reasons, have been unable to address, and while some NBFCs may want to become banks, others owned by industrial houses may not even be permitted to get bank licenses, and some may not even want to become banks. In such a scenario it is imperative for the regulator to implement systems and processes to regulate large NBFCs instead of floating such proposals in the public domain.

A newly-appointed (on October 9, 2020) deputy governor of the Reserve Bank of India (RBI) has proposed, for discussion, that large systemically-important non-bank finance companies (NBFCs) either convert themselves into banks, or that they contract assets, in order to protect financial stability. This proposal not only has major implications for prominent NBFCs some belonging to industrial houses, but also highlights the regulator’s present lack of capability to regulate such companies. Instead of arguing for the large NBFCs to either become banks or face an eventual demise by setting on a path to shrinking their size, the regulator should be examining how to improve its own regulation and supervision of large NBFCs. The collapses of IL&amp;FS (here) and Dewan Housing Finance (DEWH IN) (here) were not only a failure of corporate governance and the economic slowdown, but also the consequence of a severe shortfall in regulatory supervision.Financial deregulation and the entry of more players in the strategic financial sector require a more vigilant, intrusive regulator armed with the necessary systems, processes and human resource talent to effectively regulate and supervise the sector. Sadly, the total officer strength of the RBI is currently below the levels of 2015, and it needs to invest in more resources for regulating the NBFC sector instead of proposing to compel large NBFCs to become banks. NBFCs cater to specific needs of the economy which the banks, for whatever reasons, have been unable to address, and while some NBFCs may want to become banks, others owned by industrial houses may not even be permitted to get bank licenses, and some may not even want to become banks. In such a scenario it is imperative for the regulator to implement systems and processes to regulate large NBFCs instead of floating such proposals in the public domain.

RBI Proposal to Convert Large NBFCs into Banks: No Solution to the Problem of Regulatory Failures

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

There are degrees of stimulus across the world.  In India the figures underwhelm. Where the economy and banks were already in their own very real crisis, arguably that is where support is most needed. Of course such support would though be even more unprecedented than other countries, given the pre-existing crises and perhaps this is one reason for the RBI’s leaner stance. Still where Moody’s has just downgraded the country to one notch above junk status, we are reminded that not all countries are performing the same, in the same boat.  Indebted companies in India had some of the weakest financials in Asia before shutdown – their proverbial boat is in a different set of trouble water altogether.

There are degrees of stimulus across the world.  In India the figures underwhelm. Where the economy and banks were already in their own very real crisis, arguably that is where support is most needed. Of course such support would though be even more unprecedented than other countries, given the pre-existing crises and perhaps this is one reason for the RBI’s leaner stance. Still where Moody’s has just downgraded the country to one notch above junk status, we are reminded that not all countries are performing the same, in the same boat.  Indebted companies in India had some of the weakest financials in Asia before shutdown – their proverbial boat is in a different set of trouble water altogether. 

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

* RBI Proposal Seeks Comment By Mid-July: The Reserve Bank of India (RBI), which took over the regulation of the housing finance companies (HFCs) in August 2019, put forth a roadmap to align the regulations of HFCs with those of the non-bank financial companies (NBFC) – seeking a response from stakeholders by July 15, 2020;  and*Negative Impact to HFCs: If this roadmap is implemented by the RBI, there is no doubt that profitability of the HFCs will be further negatively impacted, given the limit on non-housing businesses (LAP and CRE). Further, NBFCs are legacy players in this space with a greater than 50% of new originations by value.

* RBI Proposal Seeks Comment By Mid-July: The Reserve Bank of India (RBI), which took over the regulation of the housing finance companies (HFCs) in August 2019, put forth a roadmap to align the regulations of HFCs with those of the non-bank financial companies (NBFC) – seeking a response from stakeholders by July 15, 2020;  and*Negative Impact to HFCs: If this roadmap is implemented by the RBI, there is no doubt that profitability of the HFCs will be further negatively impacted, given the limit on non-housing businesses (LAP and CRE). Further, NBFCs are legacy players in this space with a greater than 50% of new originations by value.

Reserve Bank of India - Still Fiddling Around A Year On

* Bring Out the Pom Poms: Prime Minister Narendra Modi finally delivered a headline that the India and the world seem to be applauding – a bold fiscal stimulus of INR 20 tn (USD 265 bn) to combat the slowdown and equates to 10% of India GDP. Mr. Modi also had hinted at “big-ticket” economic reforms to be announced in the coming days. The Street seems pleased, as at the time of writing India futures rallied 5% as Mr. Modi’s speech ended. *Don’t Chase The Financials: As is typical when governments (especially the US) print money, the cyclicals will get squeezed as poor economic conditions and capital challenges going forward have gotten priced in. In fact, we’d anticipate the weakest links within the Indian financial system to rally/squeeze the hardest. However, given how far gone some these balance sheets are, we’d caution chasing any of these names. The Indian bond market took a hit on the increased government borrowing, which now suggests even greater capital pressures as financials MTM their securities portfolios; and *Fourth Lockdown Coming: Mr. Modi was clear on a fourth lockdown, which will be communicated by May 18th – terming it “Atma Nirbhar Abhhiyan”, but believes that local states should have greater say in determining the extent of restrictions and relaxations after May 17th.

* Bring Out the Pom Poms: Prime Minister Narendra Modi finally delivered a headline that the India and the world seem to be applauding – a bold fiscal stimulus of INR 20 tn (USD 265 bn) to combat the slowdown and equates to 10% of India GDP. Mr. Modi also had hinted at “big-ticket” economic reforms to be announced in the coming days. The Street seems pleased, as at the time of writing India futures rallied 5% as Mr. Modi’s speech ended. *Don’t Chase The Financials: As is typical when governments (especially the US) print money, the cyclicals will get squeezed as poor economic conditions and capital challenges going forward have gotten priced in. In fact, we’d anticipate the weakest links within the Indian financial system to rally/squeeze the hardest. However, given how far gone some these balance sheets are, we’d caution chasing any of these names. The Indian bond market took a hit on the increased government borrowing, which now suggests even greater capital pressures as financials MTM their securities portfolios; and *Fourth Lockdown Coming: Mr. Modi was clear on a fourth lockdown, which will be communicated by May 18th – terming it “Atma Nirbhar Abhhiyan”, but believes that local states should have greater say in determining the extent of restrictions and relaxations after May 17th.

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

With large parts of India still in lockdown, there have been apprehensions that there could be an increase in corporate defaults, especially from lower rated companies. Consequently, there has been a drop in liquidity in the corporate bond markets and increased redemptions from fixed income mutual fund schemes.A few hours ago, Franklin Templeton Mutual Fund announced its decision to wind up six schemes in its managed credit funds due to a dramatic and sustained drop in liquidity in the corporate bond market accompanied by continuous and heightened redemptions. All redemptions will be halted and investors will be paid off of proportionally and in a staggered manner as the underlying securities are sold, bonds mature, and coupons are received.Net assets in the six schemes amount to INR 308.5bn (US$4.07bn). The event will have far reaching implications for the Indian markets and the Mutual Fund industry.RBI's Targeted Long Term Repo Operation (TLTRO) 2.0 that is aimed at providing liquidity to small and mid sized Non Banking Financial Companies and Microfinance Institutions saw a bid to cover ratio of 0.5 yesterday with limited participation by banks, further highlighting a reluctance to lend in the current economic situation.

With large parts of India still in lockdown, there have been apprehensions that there could be an increase in corporate defaults, especially from lower rated companies. Consequently, there has been a drop in liquidity in the corporate bond markets and increased redemptions from fixed income mutual fund schemes.A few hours ago, Franklin Templeton Mutual Fund announced its decision to wind up six schemes in its managed credit funds due to a dramatic and sustained drop in liquidity in the corporate bond market accompanied by continuous and heightened redemptions. All redemptions will be halted and investors will be paid off of proportionally and in a staggered manner as the underlying securities are sold, bonds mature, and coupons are received.Net assets in the six schemes amount to INR 308.5bn (US$4.07bn). The event will have far reaching implications for the Indian markets and the Mutual Fund industry.RBI's Targeted Long Term Repo Operation (TLTRO) 2.0 that is aimed at providing liquidity to small and mid sized Non Banking Financial Companies and Microfinance Institutions saw a bid to cover ratio of 0.5 yesterday with limited participation by banks, further highlighting a reluctance to lend in the current economic situation.

India

Shriram Finance Limited provides consumer finance services. The Company offers automobile, commercial vehicle, business, and gold loan services. Shriram Finance serves customers in India.

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Shriram Finance (SHFL IN)

RBI Proposal to Convert Large NBFCs into Banks: No Solution to the Problem of Regulatory Failures

Instead of forcible conversion to banks the RBI should ensure that it improves the regulation of important NBFCs so as to ensure that these...

Hemindra Hazari

India Banks – Not in Same Boat

There are degrees of stimulus across the world. In India the figures underwhelm. Where the economy and banks were already in their own very real...

Daniel Tabbush

Reserve Bank of India - Still Fiddling Around A Year On

* RBI Proposal Seeks Comment By Mid-July: The Reserve Bank of India (RBI), which took over the regulation of the housing finance companies (HFCs)...

Thomas J. Monaco

India - Na Ren Dra, Sis Boom Bah

* Bring Out the Pom Poms: Prime Minister Narendra Modi finally delivered a headline that the India and the world seem to be applauding – a bold...

Thomas J. Monaco

India's Bear Stearns Moment

With large parts of India still in lockdown, there have been apprehensions that there could be an increase in corporate defaults, especially from...

Brian Freitas

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