NBFC slowdown due to low demand and lack of market funding, says RBI

The slowdown in the non-banking financial companies (NBFCs) is mainly due to lower demand in the economy and non-availability of market funding, a recent analysis of the post-Infrastructure Leasing & Financial Services (IL&FS) crisis conducted by the Reserve Bank of India (RBI) showed.
 
An internal analysis, done by the RBI’s department of supervision, showed that the non-availability of funds among NBFCs from market and banks is not across the board and the “market is differentiating between good and not-so-good entities”.
 
The NBFCs are under stress primarily due to two reasons: crisis in the real estate sector and the asset-liability mismatch.
 
Separately, the finance ministry put out an official set of data on Saturday to emphasise that there is a course correction taking place among NBFCs and housing finance companies (HFCs), which it said is now “stabilising”. “The market is clearly distinguishing between the better managed and not-so-better managed entities. Everyone is moving towards a new normal,” Finance Secretary Rajiv Kumar said in a press conference on Saturday after attending a meeting chaired by Finance Minister Nirmala Sitharaman with public sector banks (PSBs).
 
The cash crunch among robust NBFCs is mainly due to a financial support from market instruments, rather than from the lenders.
 
The regulatory data showed bank exposure to NBFCs increased by 17.5 per cent between September 2018 and September 2019. Of this, the exposure to 107 large NBFCs, with a market share of around 67 per cent, grew 31 per cent. However, market financing to NBFCs increased by 4.2 per cent during this period, which was growing robustly at around 30 per cent in the corresponding period last year.
 
The analysis showed that ‘good’ NBFCs or HFCs “are able to raise funds from market at (borrowing) rates less than from the pre-ILFS period (August 2018)”.
 
“After the IL&FS default, assets of NBFCs have grown by 12.8 per cent from Rs 28.3 trillion to Rs 31.9 trillion, added significantly by government support, and assets of 211 larger NBFCs with 81 per cent of market share have grown at an even higher rate of 19.7 per cent,” the finance ministry said in a press statement on Saturday.
 
Coming to the HFCs, the analysis showed that the stress is even more isolated among a fewer firms. The ministry said in a press statement that after the IL&FS crisis broke out in August 2018, “76 of the 101 HFCs with 82 per cent of market share have shown a positive asset growth of 18 per cent” from Rs 8.45 trillion in September 2018 to Rs 10 trillion in November 2019.
 
The HFCs have, however, been pulled down mainly by nine large HFCs whose asset size reduced by 26 per cent from Rs 2.94 trillion in September 2018 to Rs 2.17 trillion in November 2019.

 
There are a total of 101 HFCs in India, of which seven haven’t commenced business after getting a licence to operate. Of 94 operational HFCs, 76 got a higher financial support from banks (an increase by Rs 1.4 trillion), the National Housing Bank and the market, whereas the lending to 18 HFCs had reduced between September 2018 and November 2019 by Rs 66,595 crore.