Davos 2019: NBFC Are Not Shadow But Real Banking, Sanjiv Bajaj Says

Indian rupee banknotes of various denominations sit in a cash register (Photographer: Dhiraj Singh/Bloomberg)

The worst of the liquidity crisis that troubled India's non-banking financial companies is gone but lending by the sector will remain soft over the next few months, according to Bajaj Finserv's Sanjiv Bajaj.

“The crisis is past but that doesn't mean things are normal,” the managing director of Bajaj Finserv told BloombergQuint on the sidelines of the World Economic Forum at Davos, Switzerland. "The smaller ones who were doing their fair share of lending over the last two years, [their] access to capital has slowed down. That's why you see their onward lending has slowed down."

I don't know how many months it will take. It is difficult to predict. We'll have to wait and watch. But it is not back to normal.

Sanjiv Bajaj, Managing Director, Bajaj Finserv

The NBFC industry and the Reserve Bank of India, according to Bajaj, need to put in place better risk pricing, more regulatory protection for non-banking lenders and smarter asset liability management to ensure that last year's liquidity crunch doesn't repeat. “The bigger question is to understand why it happened. If it was because of company A or B, it could've been very easily addressed instead of making it a much larger industry-wide issue which it wasn't. This is something the regulator needs to think about—how to prevent something like this from recurring.”

Bajaj said NBFCs and HFCs (housing finance companies) have to lend at rates which are in line with the risk they're taking. “We're going through a period where public-sector banks are unable to lend due to their own challenges. A lot of liquidity went into NBFCs,” he said. “Even younger NBFCs, flush with this money, they started lending at rates which didn't really match the risks they were taking.”

For the sensible lenders, when you see risk getting mispriced, you take a step back.

Sanjiv Bajaj, Managing Director, Bajaj Finserv

He prodded the central bank to regulate NBFCs, at least the larger ones, on a par with the banks. “There is a certain understanding that the banks will always be protected by the RBI. A similar understanding must be there for the NBFCs,” Bajaj said. “We're bigger than most banks. Rather than to think of whether this is an NBFC or a bank license, we need to think about how do you structurally make these 10-12 big NBFCs stronger.”

I think the RBI needs to sit down, understand what are the issues are at hand, they need to understand the role that some of the large NBFCs and HFCs are playing.

Sanjiv Bajaj, Managing Director, Bajaj Finserv

He also asked for a change in the definition of large important NBFCs. “The earlier definition used to be Rs 500 crore and above. That's irrelevant. The top guys are Rs 100,000 crore and 200,000 crore. So you need some structural support around them and to recognise them and ringfence them,” he said. “People say NBFC is shadow banking. It's not. It's real banking.”