Capri in the Face of Financial Crisis
A decade ago, a kirana store owner could not even consider approaching the bank for a loan. If a poorly educated woman wished to start her own boutique, she was better off reaching out to her relatives than getting sucked into the time-consuming process of borrowing from a bank that would eventually deem her creditworthiness to be nil. Today, the scenario is very different. NBFC’s have played a critical role in the financial inclusive growth of India. It is considered to be a ‘consumer finance revolution’ due to its swift processing and the substantial reduction in time taken for credit decisions. Their biggest contribution to the economy has been their role as financiers to the unorganised sector as well as to individuals without adequate collaterals to mortgage. It is undeniable that traditional banking still holds dominance in many ways but NBFCs have formed a new, parallel system that has the ability to accomplish things other financial institutions are unable to.
In 2018, the financial markets faced an extremely turbulent time when one of the biggest financial services NBFC defaulted on meeting its repayment obligations. The underlying issue was that IL&FS was using short-term instruments like Commercial Papers ( CPs) and Non-Convertible Debentures (NCDs) to meet its long-term funds requirement. They were defaulting on payments to their creditors because of Asset-Liability mismatch (ALM). Due to this cycle of borrowing funds from the market for a shorter tenure but lending for longer as well as being overleveraged resulted in market disruption.
Although IL&FS should not be compared to the rest of the NBFC sector, the event fuelled loss of confidence from creditors such as banks, corporates, insurance companies and mutual funds.
There were sharp losses in NBFC stocks, higher funding costs and massive pressure on margins. Business investors and leaders subsequently shied away from lending resulting in liquidity crisis slowing down economic growth at large. NBFC’s were abided by stringent rules from the RBI that further restricted funding. Moreover, 1500 NBFC registrations were cancelled by RBI as it stepped up supervision.
Capri’s management of the situation
While NBFCs, especially the ones catering to the urban and rural poor faced setbacks, Capri with AA rating in the industry faced this difficult time pragmatically. With financial liquidity in backup, Capri continued lending on strict merit and selective basis . It has always followed strict monitoring policies which prevented delinquency. While regulators required capital adequacy (CAR) is 15%, Capri was standing tall at 40%. The capital cover was way over 1300 crores, which ensured smooth functioning of its business. “The rich discipline of the management rules followed during this time fortified further lending provisions to its esteemed clientele,” Surender Sangar – Head of Construction Finance, Capri Global.
The underlying problem for the crisis was poorly managed ALM. However, Capri enjoyed comfortable liquidity position in the crisis as its ALM is supported by sufficient capital (CAR), long term funding and no dependency on short term funding instruments such as CP.
Capri enjoys the vision of very agile business leaders that have prepared the organisation to stay ahead of the curve. “It is the combination of our sound lending policies, vigilant monitoring, prudent and experienced top management that helped us remain unaffected by this crisis.” added Surender.
“Every 5 years, NBFCs phase through some sort of growth pangs… This happens when NBFCs take an aggressive growth path. NBFCs slow down during times of stress; and when a sense of normalcy returns, they start doing brisk business. The current stress is just a minor blip. There are higher opportunities (for NBFCs) for at least 15 – 20 more years,” Umesh Revankar, MD-CEO of Shriram Transport Finance Company.
Currently the market is very vulnerable, still reeling in the aftermath of the default. The cost of borrowing has increased substantially. The guidelines from RBI are tight and unforgiving. While the liquidity squeeze is not a new issue, it has affected the growth and margins for many players. Slowly but steadily the markets are reaching a stage of financial agreeability but it is still very delicate and demands support from the borrowers. By increasing interest rates temporarily, it can reach a stage of higher discipline and survival of the fittest according to Surender.