Since the IL&FS defaults hit last year, the non-banking financial services companies have been gasping for liquidity as risk averse lenders cut back on funding, particularly to those NBFCs that had a huge asset-liability mismatch. The measures, announced by the Reserve Bank of India and the government to improve liquidity to the sector, will only help over the medium to long term, and the so-called shadow banks are likely to continue facing pressure on growth given the wider slowdown across sectors such as automobiles and small and medium enterprises, where they have had a large share in lending, according to India Ratings and Research.
India Ratings, a unit of global credit ratings agency Fitch, has revised its outlook on NBFCs to “negative” from “stable” and has also cut its growth forecast for NBFCs to 10-12 per cent in the year ending March 2020, from 15 per cent it had expected earlier.
“Most NBFCs have been facing funding challenges post the credit crisis in September 2018, and though the funding costs have softened, they remain higher than the costs prevailing a year ago. With the funding tightness being accompanied by possible asset-side headwinds in light of slowing demand, NBFCs have been grappling with a double whammy,” pointed Jinay Gala, senior analyst at India Ratings.
Infrastructure Leasing and Financial Services had a debt of Rs 90,000 crore, when it defaulted on its repayments, sending shock waves across the sector and banks, which were already struggling with non-performing assets, and mutual funds, quickly closed the funding tap. The troubles quickly spread to other companies like DHFL, India’s second largest housing finance company, which has also seen its ratings being downgraded following defaults.
In this backdrop, NBFCs have had to look at other means to raise funds. DHFL, for instance, has sold stakes in several units to pare down its debt. NBFCs have also relied on securitisation of loans, whereby companies sell a part of their loans to other lenders and investors to raise funds.
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“Retail asset financers with long track records have been able to mobilise funding owing to the granular nature of their loan books and the control they have exhibited in maintaining asset quality. However, wholesale and semi-wholesale NBFCs in real estate, corporate lending and large-ticket housing segment have seen challenges in mobilising liabilities, largely because of the asset-side perception risk arising from the slowdown in real estate and moderation in refinancing opportunities,” said Gala.
India Ratings has a negative outlook on the large ticket housing sector due to rising inventories and funding challenges.
It also has a stable-to-negative outlook on commercial vehicle loans, given that the slowdown in economy has impacted load availability. It also has a stable-to-negative outlook on tractor loans as food inflation has moderated, input costs have risen and offtake of produce is below minimum support prices.
