The 2019 Outlook for NBFCs

Regardless of the recent panic, NBFCs are here to stay and play an important role in economic growth and financial inclusion

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NBFCs have been facing pressures on the liquidity front ever since the IL&FS story broke a few months back. The market was gripped by risk aversion which affected the flow of credit to NBFCs and HFCs. Subsequently, the government's willingness to go the extra mile for the sector's stability and growth in the larger interests of the economy has eased concerns somewhat. While a slew of measures have been announced to ensure NBFC funding is not affected, a lot more needs to be done to ensure NBFCs get back in into the growth mode so that credit needs of the informal sector in the country don't get choked. Various estimates put NBFCs catering to 30-45 per cent of the total credit in India. All the same, NBFCs have significant headroom to grow. NBFC credit as a percentage of India's GDP is approximately 13 per cent while a look around the neighbourhood reveals it to be at 26 per cent in Malaysia, 27 per cent in Thailand, and 33 per cent in China.

What More Can be Done

An easing of monetary policy to lower interest rates and a special liquidity window for NBFCs against the sale of secured loans with suitable margins would be welcome. Also welcome would be concerted policy action to promote large-scale securitization of NBFC assets so that asset-backed securities can be easily traded thereby imparting liquidity to otherwise illiquid balance sheets. This will expand and deepen India's bond market so that it can meaningfully complement the banks as a source of long-term funds. On its part, NBFCs should diversify the liability side and reduce dependence on banks and mutual funds for capital. Already market sources say the proportion of NCDs in the total borrowings by NBFCs is up to 41 per cent from 25 per cent in FY12. The focus now should be on tapping resources from new avenues like retail NCD, deposits, insurance, pension and EPFO funds.

One area of emerging concern is the increasing resort to loan waivers by political parties as a means of attracting votes. Farm loan NPAs usually increase after a loan waiver announcement as farmers stop repayments. The banks get the money from the government after considerable lag as details are framed and processes worked out. This puts pressure on banks' books, forcing them into a lending squeeze. Moreover, loan waivers not only impact bank balance sheets but also increase government spending which has to be financed by additional market borrowings, further pushing up interest rates. Policymakers would be well advised to put in place appropriate preventive measures to ensure credit flow to NBFC does not get crowded out.

The Outlook for Next Year

India has been witnessing good growth in consumer lending in recent years and NBFCs have been growing this business much better than banks. NBFCs and HFCs are recognised as being critical for growth. The liquidity situation has improved and is gradually returning to normalcy even as borrowing costs have increased by 0.5-2.0 per cent. Regardless of the recent panic, NBFCs are here to stay and play an important role in economic growth and financial inclusion. As India's economy grows, the requirement for credit will rise more than proportionately. We need both banks and NBFCs to step up to the challenge and power the economy with free-flowing credit lines.