The Reserve Bank of India announced a revised framework for non-banking financial companies (NBFCs), raising the minimum net owned funds limit while capping deposit acceptance and aligning bad loan norms with banks.
GS Sundararajan, MD of Shriram City Union Finance says his main worry is how these norms will impact customers. He says most of his customers do not have regular cash flows and a 90 days credit rule will make it difficult for them to pay.
He says if India is to follow such stringent global rules, it is best not to talk about financial inclusion in that case. He believes, in order to follow the RBI rules, the target market of NBFCs will change.
Below is the transcript of GS Sundararajan's interview to CNBC-TV18's Latha Venkatesh and Sonia Shenoy
Latha: What would you say is the impact on your group companies both Shriram City Union Finance as well as Shriram Transport? These new bad loan rules as well as capital rules from the Reserve Bank of India (RBI)?
A: The financial impact is not the main issue here. The impact is more on how much the customers will be impacted because if you are going to term people who are not NPAs as NPAs at 90 days, it is going to really cause a lot of hardship to the target market which companies like Shriram are addressing. For example if more repositions will be there, it will cause a lot more misery to the people who are otherwise going to pay up anyway.
Latha: But you have three and half years to educate them, next year it is only going to be five months. Is that not enough to educate your borrower?
A: The whole problem is this is not about education, this is about the fact that these customers have irregular cash flows, they do not have cash flows which come in exactly like the way the mid corporate people get, they are in the last level of the value chain and therefore their cash flows are not predictable and that is why banks do not fund them that is why lot of NBFCs have taken the risk of investing in capital and trying to fund these people. Today if you go and say that you will also address them like others then we are actually telling these customers that we don’t have space for you in terms of credit. If we also have the same thing as banks have of 90 days then our target market will also change, we will also keep doing the same customers.
Latha: In a sense these have become international rules, something which perhaps the Indian regulator has to synchronise with. Did you make your point to the RBI?
A: Yes that is fine but then we should not talk of financial inclusion, let us continue to have 40 percent of our people deprived of credit.
Latha: What do you see as the P&L impact though for companies like Shriram?
A: P&L impact is irrelevant, the accounting is not what I am talking about, I am talking about the kind of deprivation.
Latha: I take your point that you will have to move out of certain categories of people whom you are lending to. But for another group of people who are your investors, is there a P&L impact for FY15, FY16?
A: We have not calculated and it is not relevant because we have 80 percent coverage in terms of our gross NPA so I don’t think we will have any issues on the financials anyway. Our issue is not about financing, our issue is about how this kind of a target market which very few NBFCs are serving, is now going to go away and then why are we talking of financial inclusion.
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