Mumbai: Sachin Bansal-promoted Navi Finserv admitted that it had been reporting a spread of 14% on its loans to customers, a key red flag that the Reserve Bank of India had raised in its order against the company last week.
In a virtual meeting on Monday, the non-bank lender’s management assured bond holders that the company, which the RBI barred from disbursing fresh loans, is well-equipped to handle any situation arising over the next six months.
Navi has issued non-convertible debentures worth ₹1,500 crore, of which ₹1,000 crore through public issue and remaining through private placement. Around 500 bond-holders attended this virtual meeting, all of them eager to know whether there are concerns around the company going bankrupt and if they will get their money back.
Navi had held a similar meeting with lenders on Friday, a day after the RBI imposed the ban on the company and three other non-bank lenders from disbursing loans, saying they were charging excessive rates to borrowers.
In a PowerPoint presentation, Ankit Agarwal, the chief financial officer at Navi, said that the company’s debt repayments worth ₹3,027 crore that are due over the next six months will be taken care of through collections from customers to the tune of ₹4,000 crore. The company also has a strong liquidity buffer of ₹1,500 crore and unencumbered cash of ₹1,450 crore to handle all immediate repayments, he added.
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“We have been in discussion with RBI. We had reduced interest rates post these discussions in May from 45% to 35%. We had been taking action. But at the end it was not enough,” he said. “That said, we think this is a temporary pause. It’s not a material concern and we are not in a unique position,” he said.
Agarwal also assured that the Navi’s financials will not be affected despite the ban on fresh lending. The non-bank lender expects to post yearly profit for the current fiscal year and capital adequacy to cross 30% by March-end from the current level of 26.9%. The company also does not expect any increase in borrower defaults, resulting in higher non-performing loans.
But Agarwal confirmed that the company expects a revision in credit rating in the next few days.
Also read: Tight liquidity forces Indian NBFCs to look overseas
Navi’s core business is giving out personal loans of up to ₹20 lakh, with interest rates ranging from 9.9% to 45% per annum. As of 30 June, its assets under management (AUM) stood at ₹11,725 crore, with digital personal loans comprising ₹10,439 crore, according to Crisil. However, earnings were subdued because of higher credit costs and operational expenses. The lender made an operating profit of ₹79 crore and interest income of ₹502 crore in the June quarter.
Navi had been reporting a net interest margin of 14% on its loans, a red flag that RBI had raised in its order. Agarwal also confirmed that besides the pricing, RBI had also raised a few more specific issues. But he clarified that evergreening was not one among those concerns.
“There will be changes. We will now work with more credit-worthy customers as pricing is risk-based. I expect it to be an incremental change. We have already been moving in that direction over the last 18 months, exiting from riskier businesses. Some of these changes will now be accelerated,” added Agarwal.
“It’s a lesson learnt the hard way and we will correct it,” said Shobhith Agarwal, head of lending and borrowing, who was also present in the meeting.
Meanwhile, yield on Navi’s listed bonds spiked to 15% post the RBI action from 11.2% earlier. On Monday, Reuters reported that the non-bank lender had withdrawn a new bond issuance worth ₹100 crore at a yield of 10.4%, saying that there is no immediate need for external funding.
If within the usual 6-7 months RBI doesn’t lift the ban, Navi’s bond obligations can come under stress. “Risk-averse bond investors can seek the exit route in the listed bond market even if they have to bear 2-5% discount to the face value,” said Ameya Hardas, founder, Hinterland Research, an investment advisory company.
Saurabh Rungta, managing director and chief investment officer at Avendus Wealth Management, said, “The biggest issue for these NBFCs is that lenders may stop giving them loans or borrowing costs may see a big spike. One of the companies on this list has a very strong promoter and is sitting on adequate liquidity, so we don’t suspect it will result in an existential crisis. It may at best hurt profitability or growth this year.”
Also read: RBI warns NBFCs that chasing growth at all costs threatens financial stability
Existing loans unaffected
As of 31 March 204, 44 lenders including State Bank of India, ICICI bank, Axis Bank had given loans to Navi, and borrowings from lenders stood at ₹6,444.1 crore against ₹5,762.6 crore a year earlier.
Last Thursday, RBI temporarily barred Navi Finserv, DMI Finance, Asirvad Micro Finance Ltd (backed by Manappuram Finance), and Arohan Financial Services Ltd from disbursing new loans from close of business on 21 October.
The RBI clarified that the restrictions only apply to new loans, and that the companies could continue servicing existing customers and proceed with collections under regulatory guidelines.
The central bank’s crackdown followed months of heightened scrutiny. In recent speeches and policy updates, RBI governor Shaktikanta Das issued repeated warnings to non-bank financiers and micro-lenders about usurious interest rates.
“This action is based on material supervisory concerns observed in the pricing policy of these companies in terms of their weighted average lending rate (WALR) and the interest spread charged over their cost of funds, which are found to be excessive and not in adherence with the regulations,” the RBI said in a statement.
The regulator said the lenders failed to follow the Fair Practices Code, violated rules around income assessments, and disregarded loan repayment capacity norms for microfinance borrowers. Inspections also uncovered concerns related to evergreening of loans, asset classification, gold loan portfolio practices, and non-compliance with disclosure mandates, it said. Additionally, some had outsourced core financial services, compounding regulatory risks, the RBI added.
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