A few large banks like the State Bank of India and Bank of Baroda have shown keen interest to purchase stressed loan portfolios from Non Banking Finance Companies (NBFC) strapped for liquidity and fresh capital. Does it make business sense for the lender? Well, bank managements have announced that this is a perfect opportunity for them to meet priority sector targets and also get a quality book portfolio and balance the credit deposit ratio. Herewith, the respective bank could buy the loan portfolio from the NBFC under the direct assignment route after doing a proper due diligence and negotiating the best price. The respective bank purchasing the asset grows its loan book without much effort plus gets a good portfolio yield. Bankers expect most of these transactions to happen in segments like micro finance, commercial vehicles and mortgage loans. This is because there is visibility of asset quality and some past performance. The NBFC sector saw a huge change in the last one year, with the default by IL&FS leading to tight liquidity and increase in cost of funds. This sudden changed environment has also led to consolidation among banks with non banks. Mergers have already starting taking place—such as Gruh Finance with Bandhan Bank, IDFC Bank with Capital First and Bharat Financial Inclusion with IndusInd Bank. India’s second largest lender, the Bank of Baroda has announced plans to disperse a sum of Rs 5,337 crore in the September quarter to extend credit support to the cash strapped NBFC sector. It plans to purchase assets under the direct assignment route and also seek tie ups with large NBFCs such as Cholamandalam Finance, Hero FinCorp, India Bulls Housing and Adani Capital among others to disperse loans under the RBI co-origination model. Partnering with the NBFC under the co-origination model is a win-win situation for Bank of Baroda where it gets to add new accounts and simultaneously help the non banks to improve their solvency arising due to mismatches in asset and liability tenures. Bank of Baroda has also turned profitable during the June 2019 quarter after reporting a net profit of Rs 710 crore as against a loss of Rs 49 crore in the year ago period. Hence, most analysts and fund managers are bullish on the Bank of Baroda stock currently quoting at Rs 90 on the Indian bourses and are terming it a good buy for a six-month investment perspective for a potential 20% price appreciation.
The RBI released its Annual Report for 2018-19 this week and announced fantastic financial results. Its income zoomed by 146% to Rs 1.93 lakh crore ending with a surplus of Rs 1.76 lakh crore, thereby registering a growth of 251% over the previous year’s period. With stock market not doing well, my wife asked me if she could invest her funds (left over after losing in the F&O segment) along with the RBI! But on second thought, maybe I could also chip in my savings too!
Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.