Why more light is needed on co-loan agreements between banks and NBFCs

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Pressure from the Reserve Bank of India for co-loan deals between banks and non-bank finance companies was brought back to the limelight this week when the State Bank of India announced it had entered into a partnership with the group. Adani for the same.

Take a second to think about what the detail entails. SBI – the country’s largest lender with a customer base of 45.92 crore, a branch network of 22,219 branches and 2,455,652 employees – has reached an agreement with Adani Capital, who comes from 63 branches in 6 states with 758 employees.

The partnership – which, according to the attached press release, aims to increase lending to the agricultural sector – has drawn criticism from opposition party politicians.

Former Kerala Finance Minister Thomas Isaac for example slammed the Center on the agreement between the State Bank of India and Adani Capital for the co-lending to farmers, saying it will benefit the private enterprise more by allowing it to graft onto a public sector giant with reach and extensive expertise.

According to the SBI press release dated December 2, 2021, the public sector signed a framework agreement with Adani Capital Private Ltd, the NBFC arm of the Adani Group, for a co-loan to farmers for the purchase of tractors and equipment. ‘agricultural tools, in order to increase the efficiency of agricultural operations and the productivity of crops. The SBI is actively seeking co-loan opportunities with several NBFCs to finance agricultural mechanization, financing of warehouse receipts, agricultural producer organizations, etc.

The question, as Isaac raised, is why does SBI have to make a deal with such a small company when SBI already has 22,219 branches? SBI already has farmer credit accounts of 1.37 crore and an outstanding farm credit of Rs196,268 crore. It has supply chain credit with 28,000 dealers, 14,000 vendors and various companies. The SBI also has 71,968 commercial correspondent outlets as of March 21.

Adani capital only started operations in 2017. It has a capital of only Rs 20 crores. It has only 63 branches with 738 employees in 6 states namely Maharashtra, Gujarat, Rajasthan, Karnataka, Uttar Pradesh and Tamil Nadu. It only has 28,000 clients with an outstanding loan of Rs. 1,292 crore and a gross NPA of 1.38% already. It has a loan limit of Rs. 1476 crores from SBI, PNB, Indian, Canara, PSB, Union, Central Bank, BOI, SCB, DBS, ICICI, Axis, IDFC, Yes Bank, Karnataka Bank, Federal Bank, HDFC and NABKISSAN.

Under no circumstances will Adani Capital help SBI increase agricultural credit. But he can use the name and infrastructure of SBI to approach farmers.

What is the alternative?

It is clear that the reach of the SBI with farmers is not adequate. Thus, SBI can easily convert all 71,638 corresponding commercial outlets into micro-small branches and triple short-term agricultural credit.

The RBI, which has opposed companies going into banking, has allowed the same companies to go into banking, speeding up public sector banks through payment banks and corporations. non-bank financial institutions. NBFCs will charge much higher interest rates and service fees. Can this be authorized by RBI?

Likewise, a review of the Jio Payment Bank is urgent. In 2017, SBI entered into a somewhat similar agreement in 2017 with Reliance of Mukesh Ambani by joining as a junior partner Jio Payment Bank with a 30% stake. This time, SBI claimed that it would pave the way for more Jio user customers. In 2018, SBI reached an agreement with Reliance Jio and said that it will provide video banking services and that Jio will have a partnership in Yono, SBI’s digital transaction platform. The reality is that SBI didn’t get anything big with this deal.

The SBI 2020-21 annual report has an annex which shows that Jio Payment Bank has not made any progress. After 4 years, his deposits are only Rs 17.39 crore, loans Rs 9.74 crore and interest earned Rs 9.70 crore.

Employees and unions must oppose Adani’s deal on its merits and refuse to lend to farmers through Adani Capital. Instead, they should give direct loans. They already have links with tractor dealerships. They should not be complicit in the modern money lender Adani who uses bank money to control farmers.

Immediate investigations are needed at various levels. Who influences these decisions? Is the SBI safe?

While SBI and Adani Capital may say their merger aims to expand rural and agricultural credit, the RBI, as a regulator, needs to monitor how large corporate group NBFCs exploit bank funds. . Certainly, many large corporations have been promoting NBFCs and they have access to bank funds for loans. But recent experience has shown that the boards of NBFCs run by large corporations had to be taken over by the RBI due to non-repayment of bank debt and other moral hazard issues. For example, the board of directors of one of the largest NBFC companies, Reliance Capital, was replaced by RBI because it failed to repay debt from banks and financial institutions and allegedly lent to group companies. Thus, the relationship that PSU banks establish with NBFCs run by large corporate groups must be watched very carefully due to potential moral hazard issues.

These are risks that the regulator must keep in mind when public sector banks establish privileged relationships with NBFCs managed by large corporate groups.

Thomas Franco is Coordinator, People First and Former Chairman of the All India State Bank Officers Federation.

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