NBFCs seek liquidity support in Budget to tide over current credit squeeze

RBI monitoring NBFC sector, will take steps to ensure financial stability: Das Reserve Bank of India (RBI) Governor Shaktikanta Das during RBI's bi-monthly policy review, in Mumbai, on Thursday | PTI

Over the last couple of months, there has been a spate of downgrades of ratings of several non-banking finance companies such Dewan Housing Finance (DHFL), Reliance Commercial Finance and Reliance Home Finance. DHFL had defaulted on some of its commercial papers. It has been nine months since the crisis at the infra lender IL&FS, but the troubles of the NBFC sector are clearly far from over.

Since the IL&FS crisis, NBFCs have found it tough to raise funds, with banks as well as mutual funds reducing their exposure to the sector. The Reserve Bank of India (RBI) has cut its benchmark repo rate by 0.25 per cent in the past two consecutive monetary policies. However, the transmission of interest rates has been slow, further hitting NBFCs' ability to raise low cost finance.

Now, these companies are pinning their hopes on Finance Minister Nirmala Sitharaman to provide the much needed liquidity support through announcements in the Budget on Friday.

The key concern around NBFCs has been over their asset liability mismatch. Many NBFCs raise short-term funds via commercial papers from banks and mutual funds among other institutions, and the funds raised are in turn used for long-term lending like auto loans, home loans etc. The impact of liquidity woes of the NBFCs is visible on sales of automobiles and real estate where a large chunk of buying is financed by these shadow banks, and small and medium enterprises.

“The NBFCs and housing finance companies have been disproportionately impacted by the ongoing liquidity tightness. The impact has been particularly hard on wholesale NBFCs especially non-banks operating in real estate lending space,” said India Ratings and Research.

The Economic Survey tabled on Thursday acknowledged the issues faced by NBFCs. According to the Survey, credit growth of NBFCs declined to just 9 per cent year-on-year in March 2019, from 30 per cent in March 2018. Liquidity conditions remained “systematically tight” since September 2018, the survey further added.

“NBFCs experienced difficult times in the aftermath of the ratings downgrades and the default of IL&FS Group. Squeeze in flow of resources to NBFCs has impacted the lending capacity of the sector in recent times,” the Economic Survey noted.

Satyam Kumar, co-founder of LoanTap, a digital lending platform for salaried professionals, says NBFCs loan sanctions fell close to 31 per cent in the January-March quarter and the slowdown in the sector will have an impact on the overall economy.

“Our biggest expectation from the upcoming budget is that the government of India takes strong action to provide consistent funding to NBFCs, particularly those that follow good governance and are compliant,” said Kumar.

India Ratings expects funding for wholesale NBFCs would remain under pressure, largely due to increased risk perception resulting from emerging challenges in mid-corporate space and slowdown in real estate sales.

In this backdrop, Sujan Hajra, chief economist at Anand Rathi, says a comprehensive plan for the NBFC sector, including a performance-linked credit line is needed.

Finance Industry Development Council (FIDC), the industry body of NBFCs, has called for a special liquidity window through banking channels, which will sustainably provide growth capital for NBFCs. It also feels that the small and medium sized non-banking finance firms should be allowed to avail refinance under the Pradhan Mantri Mudra Yojana.