A roller coaster year for NBFCs

It has been a roller coaster year for non-banking finance companies (NBFCs), just recovering from the fallout of the Infrastructure Leasing and Financial Services (IL&FS) crisis. .

The six-month moratorium on loan repayments and Covid-led slowdown led to liquidity-related challenges for the sector, which, some say are yet to fully ease, but there are hopes of improvement next fiscal.

The issue was also highlighted at a recent pre-Budget meeting with Finance Minister Nirmala Sitharaman, where NBFCs sought easier credit flow and inclusion in the list of eligible sectors under the RBI’s on-tap TLTRO (targeted long-term repo operation) scheme.

They have also sought inclusion of bank lending to NBFCs by term loans in the Partial Credit Guarantee scheme 2.0, as small NBFCs do not issue bonds and non convertible debentures.

While the Finance Minister in the Union Budget 2020-21 had tried to address the already brewing liquidity issues in the sector with measures such as extending the partial credit guarantee scheme to cover securities by NBFCs and housing finance companies, the Covid-19 pandemic and the ensuing lockdown derailed much of the plans and even exacerbated problems in most sectors.

Funding

A recent report by CARE Ratings highlighted that bank lending to NBFCs increased between October 2019 and October 2020.

However, while the composition of NBFCs in bank credit increased from 6.9 per cent in September 2018 to 8.5 per cent in October 2020 and remained stable on a month-on-month basis (8.7 per cent in September 2020), the agency noted that the growth in bank credit to NBFCs has registered a downward trend.

It attributed this to “the base effect, risk aversion in banking system due to the pandemic, and due to investment by banks in NBFCs through capital market instruments supported by RBI and Government of India”.

Taking cognisance of these problems, the Finance Ministry and the RBI stepped in with measures right from April this year, including TLTRO operations, partial credit guarantee, and special liquidity scheme, which have partially aided fund raising. “But here, too, the investors are the banks,” rating agency Crisil pointed out in a recent note.

These measures have had some impact. Under the ₹45,000-crore Partial Credit Garantee Scheme 2.0, a finance ministry assessment showed that public sector banks (PSBs) had approved purchase of portfolio of ₹27,794 crore and were in process of approval and negotiations for ₹1,400 crore by December 4, 2020.

NBFCs say larger and parent backed players have found it easier to access funding, whilethe smaller and medium-sized players have not found much success in raising low cost funds.

Disbursements

Loan disbursements, too, have been impacted for some of these companies, which pride themselves on their last mile connectivity.

But as second quarter numbers and more recent data indicate, many larger NBFCs are back to nearly pre-Covid level in terms of loans, not only in gold loans but also in segments like tractor, two-wheeler and consumer goods financing.

However, the advantage for larger NBFCs has been evident – both in terms of getting funding as well as disbursements.

Outlook

A recent report by Crisil has forecast better prospects for the sector in 2021-22 with a growth of five per cent to six per cent in assets under management in comparison to the robust 18 per cent growth in their AUMs between 2013-14 and 2017-18.

But here too, growth is expected to be led by the top five NBFCs, excluding which the sector could see flattish growth.

Meanwhile, the report of the RBI’s internal working group to review extant ownership guidelines and corporate structure for Indian private sector banks could possibly pave the road for conversion of large NBFCs into banks.

The IWG has recommended that well-run large NBFCs, with an asset size of ₹50,000 crore and above, may be considered for conversion into banks, subject to additional conditions.

Just about 10 NBFCs including HDFC, Bajaj Finance, L&T Finance Holdings, Shriram Transport Finance, Tata Capital and Mahindra Finance had asset size of over ₹50,000 crore in the first half of the fiscal year and could possibly be eligible, but most have not shown much interest.

Krishnan Sitaraman, Senior Director, Crisil Ratings, said: “From a funding perspective, for larger NBFCs, the challenge is primarily their ability to fund balance sheets beyond a certain size purely through wholesale liabilities. Here, conversion to a bank does provide benefits, but over the long run.”

The faster than improved economic recovery and improved collection efficiencies are further expected to help NBFCs, at least the larger ones to weather this storm.

Much would also depend on asset quality of NBFCs.

“Going forward, slippages are expected into the harder buckets as most borrower segments, including some segments of vehicle finance, small businesses, real estate, corporate credit, microfinance have been significantly impacted,” ICRA said, adding that slippages are likely to be lower than previously expected.