NBFCs’ AUM growth rate to hit 10-year low of 6-8%: Crisil

As if the existing liquidity woes in the non-banking financial companies (NBFC) sector are not enough, a latest report by rating agency Crisil notes that the sector’s assets under management (AUM) will hit the lowest growth rate in a decade amid headwinds faced by the sector over the last 15 months.

“The trifecta of constrained funding access with rising borrowing costs, re-calibration and de-risking of loan book, and a slowing economy are set to beat down growth in the AUM of non-banks, comprising non-banking finance companies (NBFCs) and housing finance companies (HFCs), to a decadal low of 6-8 per cent this fiscal, compared with 15 per cent last fiscal,” the rating agency said in a press statement.

Presenting a report, ‘The NBFC Reset – Re-orienting Business Models Amid Headwinds’ through a media teleconference, Gurpreet Chhatwal, President, Crisil Ratings, said: “What started as a liquidity tightening due to concerns over asset liability management (ALM) mismatch has now transcended to caution on asset quality in some segments such as real estate developer loans and loan against property (LAP). Consequently, the focus on wholesale NBFCs are much more than other segments.”

The NBFC sector has been fighting liquidity crisis ever since the Infrastructure Leasing & Financial Services (IL&FS) crisis broke out in September 2018. The Crisil report, however, drew a clear distinction between non-banks that are backed by strong parentage and those without it.

The report says that strong parentage-backed NBFCs, which account for 70 per cent of the industry’s AUM, have been less impacted by access to finance, and also noted that these entities are likely to drive the sectoral growth over the medium term.

A key player

The report noted that the NBFC sector will continue to play a key role in the Indian credit ecosystem. However, the report estimates that the share of NBFC credit in the overall financial sector will drop by a percentage point to 17 per cent from the current share of 18 per cent.

“NBFCs have their own unique strengths such as customer relationship, adaptability, local knowledge and, above all, last-mile connectivity, and these aspects will keep them in good stead in the days to come,” said Krishnan Sitaraman, Senior Director, Crisil Ratings, while presenting the report.

He also highlighted that NBFCs are embracing newer business models since the liquidity crisis propped up. Sitaraman said that while the ‘originate to sell’ and ‘co-lending’ are the innovative models adopted in the asset side, securitisation, retail and offshore bond issuances are the models increasingly used on the liability side.

“Going forward, rising delinquencies will be a key monitorable for NBFCs in the light of economic slowdown. In the recent past, we have seen some non-banks merge with banks.

“The RBI also recently released guidelines for on-tap licensing of small finance banks, and this could be an option that non-banks could seriously explore to sustainably mobilise retail liabilities,” added Sitaraman.