While non-banking finance companies (NBFC) have grown strongly over the last decade, their credit growth has seen a sharp slowdown.
Consequently, credit ratings agency CRISIL expects the growth in assets under management (AUM) of non-banks, which includes NBFCs as well as housing finance companies (HFCs), to fall to a decade low of 6-8 per cent in the year ending March 2020, sharply lower than the 15 per cent growth reported last financial year.
The slowdown in credit growth comes amid tightening liquidity conditions post the crisis at infra-lender IL&FS, including rising borrowing costs and a slowing economy.
In the last five years, as state-owned banks reeled under rising bad loans, NBFCs grew strongly. These so-called shadow banks accounted for 13 per cent or Rs 11 lakh crore of the total credit of Rs 84 lakh crore in 2014. This year, its gone up to more than 18 per cent or Rs 24 lakh crore of the total credit pie of Rs 129 lakh crore. The overall share of NBFCs is expected to remain flat this year and come down to 17 per cent by 2022, amid the ongoing troubles.
The defaults by IL&FS last year shook the financial system. Banks, which were a key source to raise funds for NBFCs, quickly shied away from giving fresh loans. The closing of this main funding tap, stifled NBFCs, particularly the wholesale NBFCs, many of whom had a large exposure to real estate developer loans. These NBFCs have also seen their credit costs go up even as the Reserve Bank of India has reduced its benchmark Repo Rate by 135 basis points between February and October.
For promoter-owned businesses and those that have a large retail focus, raising funds has not been a major issue as lenders clearly segregated the NBFCs. For the parent-backed NBFCs, credit costs have gone back to pre-IL&FS level, and these NBFCs will drive the growth in the sector.
“Non-banks with strong parentage—that account for 70 per cent of the sectoral AUM—have been less impacted on the funding front. They are likely to drive sectoral growth over the medium term,” said Gurpreet Chhatwal, president at CRISIL Ratings.
Of the total AUMs of of NBFCs as of March 2019, home loans accounted for 34 per cent, vehicle finance 19 per cent and real estate and structured credit 16 per cent. Amid a slowdown in the residential real estate sector across major markets, there is a growing concern that non-performing assets (NPAs) in loans given to the real estate sector will go up.
Typically developer loans are under 3-5 year principal repayment moratorium. As the moratoria lapse, slippages are likely to manifest.
“In the real estate and structured credit space, delinquencies are likely to increase sharply; the real estate sector is experiencing significant headwinds while the financial flexibility of many underlying operating companies in the structured debt space has been impacted due to the overall slowdown in their business,” said CRISIL.
Krishnan Sitharaman, senior director at CRISIL Ratings estimates that the stressed assets in the sub-segment could be three times higher than the reported 3 per cent odd NPAs.
“Going forward rising delinquencies will be a key monitorable for NBFCs in the light of economic slowdown. Questions are also being raised over the ability of non-banks to fund balance sheets beyond a certain size purely through wholesale liabilities,” he said.
NBFCs have now begun to explore various alternative funding sources to diversify their funding base. New business models like co-lending, where capital is conserved and there is a lower risk on balance sheet, are emerging.
Many NBFCs may also look to become partners of banks, through an originate to sell model, where loans originated are directly sold to banks. Companies could also look at partnering with emerging NBFCs, which will enable deeper penetration into niche segments, pointed CRISIL.
Last week, the Reserve Bank of India issued guidelines for on-tap licensing of small finance banks. Sitharaman said that NBFCs could look to merge with banks or convert themselves into small finance banks. Of the 10 small finance banks currently operational, 8 were erstwhile micro-finance institutions (MFIs) and some of the remaining MFIs could now explore the small-finance bank route ow that on-tap licenses are allowed, he added.
