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NBFCs likely to see assets degrow in current fiscal, see subdued recovery next year

Gold loan NBFCs perhaps the only bright spot in the sector

NBFC-non-banking-shutterstock Representational image | Shutterstock

The non-banking financial services sector has been through a lot of trouble since the debt crisis at infrastructure finance company IL&FS in 2018 dampened investor appetite. Just as things were starting to look up at the beginning of the year, the COVID-19 pandemic hit and dented any hopes of recovery.

Credit ratings agency CRISIL expects the assets under management (AUM) of NBFCs will degrow 0-2 per cent in the current financial year ending March 2021. Things are expected to turnaround in the next fiscal year as the economy picks up pace, but growth for NBFCs is still likely to be subdued at around 5-6 per cent, compared to the 10 per cent growth in GDP that CRISIL expects in 2021-22.

Importantly, if the top five large NBFCs were removed, the sector de-growth would have been sharper at 6-7 per cent in the current financial year and the rebound next year would also have been much more muted at 0-1 per cent growth, said Krishnan Sitaraman, senior director at CRISIL Ratings.

“The COVID19 pandemic has brought with it three key challenges for the sector—asset quality stress, funding challenges and intensifying competition from banks. The troika of these challenges will keep growth subdued for the sector in the near-term,” he said.

Gold loan NBFCs are perhaps the only bright spot in the sector, with growth in most other segments likely to be lower than in the past.

Asset quality pressures had begun to emerge for NBFCs as the economy started slowing last year. The issues were further aggravated due to the pandemic.

CRISIL estimates that the stressed assets for the NBFC sector, including gross non-performing assets (GNPA) and potential stress in loan book, at the end of September 2020, to be around Rs 1.6 to Rs 1.8 lakh crore, in the range of 6.5 per cent to 7.5 per cent of the industry AUM. It expects the NPAs to further increase this year.

Funding has also been a major challenge as investors became wary post the defaults at IL&FS. Particularly, mutual funds and insurance companies reduced their exposure to the debt securities of shadow banks significantly in the last two years.

However, that to an extent has been compensated by banks increasing their support to the sector, aided by Reserve Bank’s various liquidity boosting measures like the TLTRO (targeted long-term repo operations) and the special liquidity scheme (SLS) for NBFCs and housing finance companies, added Sitaraman. In September 2018, bank lending to NBFCs was around Rs 5.5 lakh crore, which has now risen to around Rs 8 lakh crore.

Intensifying competition from banks, especially from the private sector, is another challenge NBFCs are going to face.

“Banks have seen a good build up in deposits, which are low cost funds. Over the last two years, they have attracted capital as well. Their NPAs have come down and provision covers have gone up. So, they are better placed than in the past to mount a strong competition to NBFCs,” said Sitaraman.

Therefore, the expectation is that NBFCs will shed at least 1 per cent market share to the banks next year.

It is expected that on the asset side, the NBFCs will focus more on retail and will also seek co-lending partnerships with banks, which will help them achieve scale. There will also be an enhanced focus on risk management and asset quality, opined Sitaraman.

Consolidation in the sector is also possible.

“We do see a sense of organic consolidation happening, the larger NBFCs are growing, the smaller ones not that much…We do believe there may be some uptick in inorganic movement (acquisitions) as well in this space,” said Sitaraman.

Recently, a report by an internal working group of the RBI recommended that well-run large NBFCs, with an asset size of Rs 50,000 crore and above, including those which are owned by a corporate house, may be considered for conversion into banks.

Sitaraman said that as some of the larger NBFCs gain scale they may face challenges on liabilities as many of them have a wholesale oriented funding base. Therefore, converting themselves to a bank will help them build a stable retail deposit base over a period, he added.

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