In today's newsletter, we talk about how the RBI finally stepped up to offer NBFCs some respite during this unprecedented lockdown.

But before we get to the story a brief on NBFCs.


The Story

While regular banks are responsible for a lot of things— including savings accounts, cheques, credit lines, etc, Non-Banking Financial Corporations specialise in certain niche areas.

Mannapuram finance specialises in gold loans, Bajaj Finance in consumer loans, India Bulls in housing loans, and this defining feature has allowed them to occupy a special place in the banking industry. But that’s not all. These institutions also cater to customers that have largely been ignored by the mainstream banking institutions. We are talking about low-income customers from places you didn’t even know existed.

However, considering almost all NBFCs are non-deposit taking, they are not subject to the same stringent RBI regulations that govern most banks and this exception has allowed them to grow at a blistering pace over the past few years (2014–2018).

Unfortunately, all growth comes at a cost.

On September 4th 2018, IL&FS, one of the largest NBFCs in the country, broke the cardinal rule of the Banking Industry. It defaulted on a series of repayments and confessed that it had run out of money.

The banks and the fund houses that had loaned generous sums to the company were stunned. They stopped extending new loans to other Non-Banking Financial Institutions almost instantaneously. The ensuing tremors shook up an entire industry. Many small and mid-sized NBFCs went bust. Even the big ones — most notably, DHFL went belly up within just one year.

The point here is this — NBFCs have been in a spot of bother for a while now and this isn’t some new development. However, ever since the government of India enforced a nationwide lockdown, the crisis has truly metamorphosized into a systemic problem for the entire banking industry.

Consider, for instance, RBI’s latest move on EMI moratoriums.

In a bid to ease the burden on the aam aadmi, the RBI walked in and asked banks and NBFCs to allow consumers to defer their EMI payments for 3 months. Now bear in mind, banks were under no obligation to comply. But if they denied customers the ability to defer these payments, it would mean more defaults. A big no-no in banking circles. So most banks saw it fit to comply nonetheless.

But NBFCs have a couple more problems. Even if they had customers who were willing to repay their EMIs in full, they wouldn’t be able to collect payment since most transactions are fulfilled on a cash basis at a physical checkpoint. And since there’s no way NBFCs can now deploy a mammoth ground force to keep this bit going, they’ll just have to defer EMIs for most of their retail customers.

Also, what about the EMIs NBFCs are expected to pay.

After all, they borrow from other big banks and they’ll have millions in repayment obligations lined up these next few months. So one could argue that they ought to be able to defer their payments just like the aam aadmi, right?

Unfortunately, RBI has remained coy on this matter and the banks are still debating whether they ought to give NBFCs some extra leeway.

But almost everyone agrees that these institutions need help. So the RBI finally intervened last week staying true to its moniker— the lender of last resort.

First, they started with another bout of TLTRO. Something that we’ve covered already—here and here.

But if you need a recap, know that RBI wants to provide long term loans (worth Rs. 50,000 crores) at low-interest rates (rates that you only get on short term loans). Unfortunately, they can’t extend this opportunity to NBFCs directly. So instead they extend it to banks and force them to lend to NBFCs.


RBI also modified its earlier guidelines to allow NBFCs, Housing Finance Institutions, and Microfinance Institutions to re-commence operations with ‘bare minimum staff’. This move will go some way to solve for loan recoveries, though it will still be challenging.

Additionally, the RBI will also provide refinancing facilities (the ability to take out a new loan to meet existing loan obligations) to the likes of NABARD — National Bank for Agriculture and Rural Development, Small Industries Development Bank of India (SIDBI), and National Housing Bank (NHB). And once these guys won’t have to worry about coming good on their obligations, they are likely to extend more loans to NBFCs so that the cogs of the financial ecosystem can be laced with monies at all times.

The End!!!


The Oil Tales

Also, in other news oil did something so ridiculous last night, that it's almost too hard to explain. So you'll just have to bear with us while we take you on a short trip to woo-woo land.

At about 10 pm, we start working on an infographic showing all the things that are less expensive than a barrel of US Crude oil (WTI). Oil was then trading at $9 per barrel and so we used dollar items (like US burgers and US haircut) as a barometer for comparison.

By the time we finish the infographic, oil is trading at $2 a barrel. So now we redo the infographic with Indian items and in rupee terms because — “levels”

By the time we get through with the latest infographic, oil is dangerously flirting with zero. So we ditch the infographic altogether and decide to put up this meme we found online.

5 mins later, oil is at -$15 per barrel. At this point, we don’t even know what to do. People are getting paid $15 to buy oil. What on earth? So we simply redo the first infographic with a different title

And by the time the carnage is complete, oil is trading at -$37.53. Negative 37 dollars.

Unprecedented. Has never happened before.

Now obviously there are some fine distinctions here. Not all oil is trading at negative levels. It's a specific type of oil (WTI). Also, this doesn’t mean you start expecting people to pay you money to buy oil. Not happening. But beyond all this, the story requires more nuance, which is why you’ll have to wait until tomorrow for an elaborate exposition on the matter.

Until then…

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