Non-banking financial companies in India have started to explore funding opportunities for distressed small and medium enterprises (SMEs). While some NBFCs would be looking to help the promoters of such firms by helping them with one-time settlements, others will be looking to fund the promoter at the bidding stage, as the government is looking to allow SME promoters to participate as resolution applicants.
To be sure, on 23 May, the Union Cabinet approved an ordinance to amend the insolvency and bankruptcy code allowing promoters of micro, medium and small enterprises to submit their resolution plans during the resolution process under the IBC in accordance with suggestions made by a 14-member insolvency law committee to the ministry of corporate affairs. The ordinance, which secured the president’s assent on 6 June, however, bars wilful defaulters from bidding.
“Most SMEs will be pitching for one-time settlement, as resolution through IBC will be long-drawn and at the same time many suitors may not be available for the firm on the block. Considering the SME universe is large, NBFCs with a strong SME focus will be looking at funding opportunities in the distressed SME segment as well. Their decision, however, will largely be decided by the quality of assets and collateral along with the Reserve Bank of India’s view on such refinancing,” said Nachiket Naik, managing director at IREP Credit Capital Pvt Ltd, a Mumbai-based NBFC.Naik said one-time settlements will also be more beneficial for the lenders as the haircut may be less than what they may have to take in a resolution through the IBC route. “The NBFCs will also be keen on assisting the SME promoters at this stage with respect to providing funding for bidding,” said Naik.
NBFCs are seeing an accelerated pace of growth as public sector banks and the Indian banking system on the whole grapples with a huge pile of non-performing assets and financial frauds.
Additionally, NBFCs are seeing a robust growth in their loan book due to their growing aided by a more adaptable and flexible operating model than that of banks.
“ICRA expects the NBFC-retail credit, which stood at Rs.7.5 trillion as on March 31, 2018, to expand at 19-21% during fiscal 2019… On the other hand, SME credit, driven by sizeable unmet demand, increased working capital requirement post GST implementation and, limited credit availability from banks, is expected to grow at 23-25% in fiscal 2019,” ICRA Ltd said in a note on 28 June.
IIFL Finance is also exploring the business opportunities presented by the amendment. “We have already started discussions internally on the kind of funding we can provide to distressed SMEs who have reasonable models and quality collateral to offer. Considering the current environment, it is a good idea to be in the distressed assets business. While we are discussing both equity and debt funding opportunities, we will be biased towards debt funding as this is something we have been doing traditionally,” said G.L. Kumar, head of MSME business at IIFL Finance. He, however, said there is a need for clarity around the definition of ‘willful defaulter’.
Differential treatment for SMEs for the resolution has been suggested by multiple stakeholders as the firms may not see much interest from bidders and may end up in liquidation, thereby defeating the objective of IBC.
“For an SME, resolution under the IBC can prove to be very long-drawn and expensive. Hence, it is advisable to resolve them outside the NCLT through one time settlement. Some private sector banks are active in this space, but NBFCs can tap the business opportunity in offering assistance for one time settlement and also during the resolution process,” said R.K. Bansal, managing director at Edelweiss Asset Reconstruction Co.
Source: LiveMint, July 17, 2018