Large NBFCs see significant jump in public deposits in FY19

Despite widespread pessimism surrounding the non-banking financial company (NBFC) sector, some of the leading deposit-taking NBFCs with good credit rating and an established franchise, managed to post a significant growth in ‘public deposits’ in FY19.

The year 2018 was a tumultuous one for the shadow banking sector, which was marred by the IL&FS default and the consequent liquidity crisis in the economy.

“Growth in FY19 was driven because of a renewed focus by larger NBFCs, namely, Shriram Transport, Bajaj Finance, Mahindra & Mahindra Finance, Shriram City Union Finance, and Sundaram Finance, as cost of funds from other sources went up,” said AM Karthik, Vice-President & Sector Head-Financial Sector Ratings, ICRA.

According to ICRA, deposit-taking NBFCs account for about 15-17 per cent of NBFC assets. The rating agency also estimates the total public deposits of NBFCs as on March, 2019 at about ₹41,000 crore (provisional), up from about ₹32,000 crore in March, 2018.

Among prominent NBFCs, Mahindra Finance’s fixed deposit, which enjoys a Crisil rating of ‘FAAA’ indicating a high level of safety, grew 81 per cent on a year-on-year basis from ₹3,124 crore in March 2018 to ₹5,667 crore in March 2019.

“Normally retail finance will always be costlier, but this is the first time we are seeing retail money cheaper than the wholesale finance,” said V Ravi, Executive Director and CFO, Mahindra Finance.

“But not all NBFCs have access to cheaper public funds. In addition to good credit rating, factors such as reliability, trust and credibility determine public participation,” Ravi added.

While there are more than 10,000 NBFCs in the country, there were 88 deposit-taking NBFCs as on April 2019 as against 168 entities in March 2018.

“Over the last few years, the RBI has tightened its control on NBFCs taking public deposits resulting in surrendering or cancellation of deposit licences and, in 2014-15 it reduced the threshold for deposits (for AFCs) to 1.5 times net owned funds (NOF) from 4 times NOF, ” Karthik said. Shriram Transport Finance Company, a deposit-taking NBFC that extends commercial vehicle financing, also saw its public deposits grow by 21 per cent to ₹9,721 crore as on March 2019. Chennai-based Sundaram Finance’s deposits crossed the ₹3,000-crore mark in April 2019.

“In Shriram Transport, we don't borrow short-term money because on the ALM side, most our assets are for 3-year tenor so we focus on 3-year deposits to have door-to-door between our assets and liabilities,” said a spokesperson of the company.

Some NBFC players also said that interest rates through wholesale borrowing (bank loans) have gone up since the bank’s credit growth is at 18 per cent but their deposits are growing only at 8 per cent, thereby increasing their spread. Increasing cost of borrowing and narrowing funding sources has also led to the ‘retailisation’ of the borrowing profile of NBFCs.

“Our plan is to take the retail participation (FD plus retail NCD) from 12 per cent to about 20 per cent in a year’s time,” Ravi said.

The spokesperson for Shriram Transport also said the company plans to increase its retail liability to 20 per cent of the total borrowing from 15-16 per cent, which includes fixed deposits and NCDs.

“While we expect them to increase the share of deposit (a form of retail funding) in their borrowing profile, most of these entities are expected to cap deposits at about 1-1.2x of NOF in the medium term,” Karthik observed.

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