Bailout or opportunism? India’s largest bank is tripling its loan purchases from desperate NBFCs

• On 9 October, State Bank of India (SBI) announced plans to purchase ₹450 billion worth of “good quality loans” off the balance sheets of non-banking financial companies.
  
• The amount is exactly three times SBI’s original acquisition target of ₹150 billion for the current financial year.
  
• The move will inject some much-needed liquidity into India’s NBFCs, which are finding it difficult to raise funds at feasible rates from debt markets.

On 9 October, State Bank of India (SBI), India’s largest bank, announced plans to purchase ₹450 billion worth of “good quality loans” off the balance sheets of non-banking financial companies (NBFC), which are currently dealing with a shortage of funds. Subash Chandra Garga, the secretary of the government’s economic affairs department, tweeted his support of the move.



The amount is exactly three times SBI’s original acquisition target of ₹150 billion for the current financial year. The NBFCs will sell the loans on a full-cash basis so as to finance their immediate lending operations.

Despite reports that it has been “pressured” into giving the non-banking financial sector a lifeline, SBI seemed clear in its motivation. This is a good deal for the state-owned lender. It is purchasing the loans at very attractive rates given that NBFCs are struggling amid the potential default of IL&FS and its subsidiaries, which has sparked a market meltdown and fears of a liquidity crisis.

As a result of the crisis, NBFCs are unable to raise short-term funds from debt markets at feasible interest rates. This is a huge problem given that these institutions are important sources of funding for infrastructure and housing projects as well as the MSME sector. More importantly, small businesses count on loans from NBFCs ahead of the festive sales season, which is scheduled to start this week.

Setting aside the fact that SBI’s balance sheet will likely be strengthened with high-yielding assets, the move will inject some much-needed liquidity into India’s NBFCs.

It will also help SBI achieve its priority-sector lending targets, under which it allocates a certain amount of its credit portfolio to the agriculture, MSME, housing and education sectors. When faced with a shortfall in its priority lending targets, India’s state-owned banks usually purchase loans from NBFCs, which lend to these sectors.

Separately, the Reserve Bank of India is also doing its part to inject some liquidity into financial markets. On 9 October, the central bank announced that it was purchasing ₹120 billion worth of government securities to ease cash flow pressures in the financial sector ahead of the festive season.