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I Would Expect From RBI Is To Issue A Clarification To Set Rest All The Speculation: Sanjay Chameria, VC & MD, Magma Fincorp

BW Businessworld’s Manish Kumar Jha in conversation with Sanjay Chamria, VC & MD, Magma Fincorp on the status of NBFC and the expectations from the government during the pandemic.

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Magma has a pan India presence spread across 22 states and union territories espoused the policy of financial inclusion by focusing on customers who are left out of the banking network. Magma is one of the few NBFCs which has a diversified liability profile encompassing bank lines, capital markets and securitization transactions. BW Businessworld’s Manish Kumar Jha in conversation with Sanjay Chamria, VC & MD, Magma Fincorp on the status of NBFC and the expectations from the government during the pandemic.

Condition of the market is rolling down not India but globally COVID pandemic can stall now and that is the first and especially the NBFC segment also the part of the Eco-system get affected first because you are also the part of the ecosystem because you provide credit to the other industries.

Now, let’s talk about the first question, let’s talk about various loan segments. How you are facing the challenges? What is your contingency plan?

Right now everybody is overwhelmed with the kind of situation that we are facing in India for the last one month and in the last 2 weeks we have seen the lockdown has been enforced in the whole country. So no amount of business continuity planning which we envisaged we ever imagined that all the several hundred branches and thousands of employees will not be able to move in the markets.

And especially for a company like ours which operates in the informal segment and in the real towns where meeting customers personally and visiting their houses is imperative. While giving the loans and while collecting the instalments is the norm, so there is no kind of BCP which would address that requirements. So, truly speaking, we are quite overwhelmed.

Having said that, 5 days prior to the lockdown because we are headquartered in the Mumbai and here the partial lockdown had been enforced already! 50% of our workforce was working from home, so, we actually had set in motion the entire BCP plan and SOP writing and upping the cloud capacity for servicing through the servers and the guys who will work from home those that may be needed for critical work.

We built various trackers on the business, on the collections, on the movements of files and various other things. There is a war room kind of a situation where the control room was set up on 16-17 March. And by the time the lockdown was implemented on 25th March, we had already implemented total work from home from 19th of March itself.

But having done this and in fact, we dispatched about 1,500 laptops and desktops to the employee's homes. Especially the telecallers since they are critical in reaching out to our kind of customers who are not very literate, thus we need to call them up every time prior to the due date to remind them. This physical prudence of maintaining their payments on time is essential so that their credit scores improve.

So, how much of your revenue collection has been impacted? If you calculate say, “15-20” days, could you give us some indications?

So, actually 25th March is when the collection came down to a virtual halt. So, we are collecting less than a crore per day and now as on 1st April which was the banking holiday so 2nd April like we had deposited ECS mandate or PDC. So, we will know in a day or two but I really feel that most of the instruments will bounce because once these customers that we lend to in fact all the NBFC lends to they belong to the “earn and pay” category and they are not a salaried class that they will get the credit of the salary on the last day of the month.

So, they have to earn and pay. So now that their trucks are stranded on the highways. Farmers are not able to harvest their crops, and truckers won't be able to take it to the mandi, so how will they get money from the pay agencies and governments. So, the entire test cycle has come to a grinding halt. So, my suspicion is that a lot of ECS bouncing will be seen. It is not going to improve until the lockdown is not lifted which is tentatively on the 14th of April.

Even thereafter I think customers will have to first deploy their productive assets, which is the taxi or trucks or tractors or equipment’s and then open their shops and you know contractor job and only after one month when the cycle becomes normal they will start getting payments from their principle and then they will be able to start paying to us. This is probably going to be the reality

Now, RBI spoke about the loan Moratorium but there is confusion among the people and also for the readers as they would like to know on loan moratorium segment-wise and how it works?

Sure, well it was announced by the governor on 27th March and thereafter the circular also came from RBI and while I agree with you, “there is some confusion as to which segments of the borrowers are entitled to the moratorium” so far as the retail customers are concerned, whether you give moratorium to them or not they are not in a position to pay.

So, whether you offer them moratorium or not they will not pay, that is the reality. So, to my knowledge all the NBFC and the banks which are lending to the segment that we cater to have gone ahead and extended moratorium, carte blanche to all the customers in this category. The only exception is that the customers who are already an NPA asset, that means they have already defaulted more than 3 instalments, here there is no point of giving the moratorium because that customer is already a defaulter.

So, the customers who are in the standard asset category which is either their current or their maximum 2 instalments defaulted, because you know NPA gets classified only when you cross the 90 dpd, customers who are 3 months default. So as long as you, not 3 months default, every company and bank has given the moratorium option to the customers.

Now, comes to the confusion part of it. The NBFCs rely upon banks and capital market players like mutual funds, insurance companies for the liability side. Now SEBI has also issued a circular on 30 March, in which they have allowed the Mutual funds which come under the ambit of SEBI regulations that they can on an individual case by case basis, they can also allow the moratorium as per the RBI guidelines of Moratorium.

So for example, we have already written to the mutual funds who have invested in our papers which is the NCD, bonds or purchase our portfolio. Similarly the banks also, the RBI has given them the option that you can grant moratorium to the companies and all the borrowers and they have not singled out NBFC, and they think that you can grant a moratorium on a term loan for a period of 3 months however for working capital there is no moratorium.

In the case of working capital, it is only interest on which they have actually asked the bank that you can provide the moratorium for a period of 3 months. So, this is what RBI has done its bit and now, “I don’t know where this confusion has arisen because of the FAQ which has been released by the IBA, Indian bank association” saying that, “The moratorium is not available or NBFCs are not eligible for the moratorium”. So I don’t understand as to why this confusion has arisen because the RBI circular is quite explicit and clear, it doesn’t make any distinction between NBFCs and Non-NBFC as a borrower category for being eligible for the moratorium. And secondly for the working capital, whether it is the manufacturing company or a service company, finance company, no moratorium is being given to anybody. So, to my mind it is quite clear, so what we have done as an industry we have already written to the RBI saying that this kind of confusion is going on by way of the reforms and the FAQ by the IBA. So it would be best to issue a clarification to set all speculation at rest.

Now the third part, the RBI circular is not comprehensive, in the sense that it talks about the term loan, it talks about the working capital and it also talks about commercial papers etc. But what it doesn’t talk about is the “securitization” which is the PTC instrument and the direct assignment. You see in the last 18 months post the IL&FS crisis banks have instead of giving the direct line of credit to the NBFC, they have been buying portfolios from them.

Under the guidelines of RBI, they can buy the portfolio from any NBFC which is seasoned by a minimum 6 months and against that they provide the funding. So, what NBFCs do for example originate the loans, like for example I will give the primary loans to the small-borrowers and then at the end of 6 months, each loan which has completed the 6 months in my books and there is a repayment behaviour of that customer and he has paid 6 instalments. I can then approach a bank filling together say, 5000 loans or 10,000 loans and give it to a bank and then bank provide money to me against that proof and that way I release my capital and I can book cash lending.

Now RBI in the circular doesn’t talk about granting a moratorium in respect of the PTCs and the DA. Now in case of PTC and DA, we have already sold it to the banks, then our loan is that of a service, which means we collect the instalment from the customer and we validate it to the bank which has bought the portfolio.

Now we cannot grant moratorium to our customers unless the buying bank grants the moratorium to us because our role is only that of a servicer. So, we have also written to all the banks after our board decision was taken to extend the moratorium, but we are not distinguishing between customer A and customer B, we are offering it to all the customers.

We have requested those banks to grant us the moratorium on the loans that you have bought from me so that this can be passed on to the customers.

So are all NBFCs going through this phase which affects securitisations?

So, all the NBFCs to my knowledge have already written to the respective banks where they have sold the portfolios. So, this is where we stand and we have represented the same to RBI, that they need to issue a clarification with regards to PTC and the DA whether these two instruments are also eligible for the moratorium.

So, in the present situation of course based on the collection will there be a credit blockage from magma? Or from your side what is your position? Will you stop in terms of giving credit to? Of course not complete blockade but in a partial way you will you restrict yourself?

See, first of all I feel based on the kind of situation we are in, there will be a significant contraction in the demand for credit. After 14 April, even if the lockdown lifts, it may not be lifted across the country.

So people will first evaluate and start moving out and start making sure that they are able to get their contracts, they are able to work and they are able to earn. In my view, Q1FY21 we need to all focus on the collection and make sure that our existing more than 5,00,000 customers that we have at Magma are able to get back to their livelihood. Their fate then and their ability to be able to deploy the asset and they are able to earn and we are able to collect the payment from them will be our focus. And in the meantime, if these customers of ours, if they require any loan of course that will be our first priority to help our existing customers and thereafter if there are some customers. Because we also have 9000 channels which we also work with for sourcing customers. If they bring some genuine customers and if their business is up and running, not impacted as badly and he can pay instalments in future under the current circumstances we will extend loans to them.

But I don’t think, the normal lending activity will resume before June this year. Even if the lockdown lifts completely by April end, it will take at least two months’ time for normalcy to return. This is the “most optimistic scenario”.

What are the liquidity cushions you have to meet your debt obligations now?

See, So far as my liquidity position at Magma is concerned, we anyways have decided not to opt for the Moratorium in the month of March and we have already paid all our obligations. We are luckily in a position that we don’t have too much liability on

accounts of NCDs and Bonds and so on. So, therefore we don’t have that repayment coming up. We have working capital liability, and we have term loan liability.

In respect to term loan, we have certain re-payment which comes on every month in both interest and the principles, so what policy we have decided as a company and not necessarily the representative of the industry. It is only company-specific that, even if the Moratorium is available we are not going to seek the Moratorium, we will rather pay the April-May amount payable to the banks because we have sufficient liquidity.

We would rather like to take advantage of the facility which is provided by RBI under the long-term repo auction (LTRO) which is a long term, you know they have given the window of 100,000 crores in which banks can invest into the debentures and bonds of investment-grade companies, and we have a AA rating. So, we feel we will be able to rather take fresh borrowing, but we will not seek moratorium as we have sufficient liquidity.

These are these challenging times for the NBFCs and of course, you are the part of the eco-system. It’s good that you have the liquidity enough to continue paying to banks, besides the LTRO what are the other expectations from the government and the RBI which can mitigate the problems?

Expectations are that RBI did come out with fairly good measures in terms of the Moratorium on the term loan, moratorium on the interest on the working capital, moratorium on the interest on the term loan too. But the first thing which I would expect from the RBI is to issue a clarification to set rest all the speculation.

The second expectation that I would have from RBI is that they should also include the PTC and the DA because so far, as the retail borrower is concerned whether you to have funded for the working capital or term loan or PTC or DA the customer is not concerned. He will say, I need a 3-month waiver, so I think that is the second thing that RBI should do.

The third thing which RBI should do is right now again the circular is ambiguous, it says, “you give 3 months Moratorium only on the instalments that are falling due between 1st March and 31st May”.

So between 1 March and 31 May, 3 instalments are due. So now consider the case, where the customer is one instalment default or two instalment default, which means is he is not an NPA customer he is a standard account. Today even if you are two instalments default, but if you are within 0-90 you are a standard account. Now RBI circular is ambiguous that standstill clause which applies on the instalments falling due between March and May.

If it is not extended on the standard account where there is a one instalment default or a two instalment default. So even then you have offered moratorium the account will become NPA. Now let me give you an example; say on 29th February 2020, if the customer had fallen short on two instalments. So, he is sitting on the 61-90 as on 1st of march because 2 instalments have skipped as of March, but now March instalment he gets a Moratorium but he has to pay only in June but the two instalments which were overdue on 1st of March for Feb & Jan. So, that was on 60 days past due, that will become 90 days past due on 31st March. So, as per the RBI guideline, “even if these 2 instalment is due not 3 instalments but because of those 2 instalments are more than 90 days it will become an NPA. Now this will create mayhem for the industry because we deal with the customer who is basically marginal MSMEs, marginal farmers and they earn and pay. They don’t have liquidity with them.

So what we have represented to RBI that there is no moratorium required on the past instalments but you create a standstill so that it doesn’t become a NPA otherwise the whole NPA will shoot-up in March. This Is the 4 expectation from the RBI. I think these are the 4 points and we have actually represented to RBI and we are part of that committee which has done this representation on behalf of CII, FICCI where we have NBFC committee as well as FIDC which is the NBFC specific association so we have done all of these representations to bring back normalcy.

The RBI Governor has talked about the “Doomsday”! Former Governor Raghuram Rajan has spoken about crisis unfolding which would be something on a big scale. GDP is being talked about in the rage of 1.5- 2%. How do you look at the economy? Do you see some positivity Post Covid-19 scenario?

Sanjay Chamria: See, right now it is way too early and these are all the various scenarios which are being projected. It is for sure that in FY21 our GDP will be among multi-decade lows and if you look at the entire range of the GDP estimate, from a low of 2% to a high of 3% it is growing and if you look at the median it will be no more than 2.5.

You see, what is estimated to be the GDP in FY21 and I am quoting from more than 10 research houses and the rating agencies what estimate they have put out. Second is that what I quoted is the most optimistic scenario that by June everything will be working, but this is by no means a realistic scenario. You don’t know as to what is the extent of the spread that we are going to have, I mean if you look at various countries we are still seeing the number of virus affected people rising.

The prediction is COVID-19 will spread until this month and might spill into next month?

In my view at least minimum 3 months and otherwise, it can go up to on a second-quarter that means by September the situation will normalize. I also see another problem, is that the auto sales are down by more than 50% in March and there you had the BSIV and you had the year ending and until 20th March things were going normal. In the month of April, you will see the auto sales in my view and it could be a “doomsday” it could be down by more than 70% and May and June is unlikely to recover fully. So, Q1FY21 could be a washout from an auto sales perspective and auto sales is considered to be the bell weather of any Economy whether developed or developing. So, that is going to be down by 50% in Q1 minimum, and it could be more. It means that it is going to take a while to recover also it will reduce the GST revenue for the government. Auto sales contribute a significant part of the revenue for the government. So, the government revenue getting impacted it also handicapped them in terms of providing the stimulus and subsidy.