Rs 45,000 crore NBFC loan portfolio buyout: Is State Bank of India being cast in role of knight in shining armor?

The State Bank of India (SBI) is gearing itself to buy a whopping Rs 45,000 crore from the books of Non Banking Financial Company (NBFCs) some of which predictably would also include the loan portfolio of the beleaguered Infrastructure Leasing and Financial Services (IL&FS) and its myriad labyrinthine subsidiaries. It says it senses a business opportunity here as in its perception the NBFCs would be happy to unload some of their loan portfolios at a discount. The SBI says it is scouting for good quality assets. [caption id=“attachment_4393467” align=“alignleft” width=“380”]  Representational image. Reuters[/caption] Now that seems to be one big gamble and also a contradiction. Why on earth should NBFCs sell good quality portfolios at a discount even if it’s for beefing up its precarious liquidity? It is widely known that NBFCs cater to small businesses that cannot either stand the heat of the more intense application scrutiny of the regular banks or are in a tearing hurry to jump ahead of the red tape. The SBI should not buy a pig in a poke. That it is indeed doing so is clear from the fact that it does not seem to have done extensive investigative work about the loan portfolios it is buying as evident from the extraordinary speed with which it has announced its move. In the event, one suspects if SBI is cast in the role of knight in the shining armor by the government for which it is in any case ill-suited what with its own financials not in ship shape. SBI itself is in knee-deep in trouble with NPAs on the back of behest lending more than others plaguing it continually. Now is it going to rescue damsels in distress? Is the talk of business opportunity hiding something sinister—another government company sticking its neck out? LIC and the government are being pilloried for the former being ever-ready to rescue about every other public sector undertaking in distress. The recent bailout of the failing IDBI Bank by LIC and the storm it created is fresh in everyone’s mind.

LIC at least is not a listed company but SBI is and it has a lot to answer for to its shareholders. It is not as if shareholder interests are more vital than policyholders’.

To be sure, LIC too is guilty of compromising policyholders’ interests by donning the robes of the knight in shining armor again and again but SBI’s brinkmanship has invited greater skepticism and justified questioning in the face of its relative weak financials. The SBI is not an asset reconstruction company (ARC) so as to be scouting for receivables that it can buy at a bargain price. The few ARCs we have themselves have nothing to write home about on this admittedly dicey business. In the event, SBI could be accused of rushing in where angels fear to tread. ARCs by definition are supposed to fish in troubled waters and also swoop down on troubled assets like vultures but a bank with a lot of exposure to NPAs has to remain within the confines of the straight and the narrow lest it takes more beatings in the rough and tumble of the loan market. The Firstpost story in this regard  also makes a cynic like this writer flag more issues. The National Housing Bank (NHB), which regulates the non-banking finance companies, also said that it will enhance the refinance limit for NBFCs to Rs 30,000 crore to inject liquidity in the face of the heightened needs of liquidity by them in the face of the IL&FS scare that has indeed made them risk incarnate. But then it is one thing for a refinancer to assume greater risk but quite another for a banker to do so. Institutions like SIDBI were specially set up for giving a leg-up to small and medium sectors mainly through guarantees. But over the years SBI has lent itself supinely to be the prime lender for politically interesting causes like loan _mela_s to farmers and so on despite losses writ large on them. (The writer is a senior columnist and tweets @smurlidharan)