Money & Banking

As fresh disbursements drop sharply in FY21, AUM of NBFCs will de-grow for first time in two decades: Crisil

Our Bureau Mumbai | Updated on July 29, 2020 Published on July 29, 2020

The Assets under management (AUM) of non-banking financial companies (NBFCs) will de-grow for the first time in nearly two decades as fresh disbursements in FY21 drop sharply, according to Crisil Ratings.

NBFC AUMs are expected to de-grow 1to 3 per cent in the current fiscal (FY21). Excluding the top 5 NBFCs, the degrowth is expected to be even sharper at 7 to 9 per cent, it added.

Highest de-growth

Among the segments, the highest de-growth will be in the real estate and structured credit (10 to 12 per cent de-growth vs 8 to 10 per cent de-growth in FY20), followed by vehicle finance (3 to 5 per cent de-growth vs 5 to 7 per cent growth) and micro, small and medium enterprise (MSME) finance (3 to 5 per cent de-growth vs 3 to 5 per cent growth).

Gold loans will see the highest growth among all the segments at 14 to 16 per cent (22 to 24 per cent in FY20), followed by unsecured loans (3 to 5 per cent vs 25 to 30 per cent) and home loans (0 to 2 per cent vs 5 to 7 per cent).

Krishnan Sitaraman, Senior Director, Crisil Ratings, said: “While disbursements across segments are expected to fall 50 to 60 per cent, AUM trajectory will differ by segment.

Crisil’s analysis of the largest segments of the NBFC AUM pie shows that most segments could witness contraction in the current fiscal.”

The silver lining, however, would be gold loans, which constitute 5 per cent of the AUM. Growth here is seen to be relatively higher as more individuals and micro enterprises go for it to meet immediate funding needs, Sitaraman added.

Four factors at play

Crisil said four factors are at play when it comes to disbursements. First, the challenging macroeconomic environment, which would curb underlying asset sales, especially in the two biggest segments of housing and vehicle finance.

Second, sharper focus on liquidity as incremental funding is not easy to come by for many players in a confidence-sensitive scenario. Third, stiff competition from banks as funding costs for many NBFCs remain relatively high; and, fourth, tightening of underwriting standards by NBFCs amid weak economic activity and expectations of increasing delinquencies.

Crisil observed that in the current environment, competition from banks, especially in the traditional asset classes such as home loans and vehicle finance, is expected to be substantially higher, given that banks have surplus liquidity and their focus will be on these asset classes in the retail space.

But in real estate and structured finance, NBFCs have been catering to borrowers at the project stage, where banks do not have a major presence. As for micro, small and medium enterprises, especially loan against property and the unsecured segments, even banks are expected to be cautious. As a result, NBFCs could still find a footing in the second half of the current fiscal.

Despite intensifying competition from banks, NBFCs are expected to tighten their underwriting standards because of worries over asset quality deterioration. Such circumspection may limit disbursements to real estate, structured finance, MSME finance, and unsecured loans.

Funding woes

Crisil underscored that access to incremental funding will be the bigger challenge, as reflected in corporate bond and commercial paper issuances of NBFCs over the past 20 months or so.

“Redemption issues and risk aversion at mutual funds (a key investor in this segment) are compounding the woes. Securitisation, too, has seen very few transactions after the onset of the Covid-19 pandemic because of asset-quality fears and lack of granular data on collection efficiency,” the agency said.

Ajit Velonie, Director, said: “Despite the decline in interest rates over the past six months, the funding cost for NBFCs has remained relatively high because of risk aversion among investors and lenders.

“On the other hand, public sector banks and leading private banks have surplus liquidity, marked by improving low-cost funding such as current and savings account deposits. With banks sharpening focus on retail loan products, NBFCs are expected to lose share, especially in the housing and vehicle finance segments.”

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Published on July 29, 2020
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