Non-banking financial companies (NBFCs) have seen a significant improvement in handling of assets, even in the high interest-rate regime, according to the quarterly results’ numbers.
These companies, which directly complement their financial counterparts, the banks, outperformed them in terms of bringing down gross non-performing assets (NPA).
Better reach of NBFCs and their ability to manage smaller accounts has helped them beat the downward trend of asset quality.
“NBFCs have much larger ability of physical recovery. Also, they do not reschedule loan repayments like banks,” said Ramesh Iyer, managing director, Mahindra Finance.
Also, short-term and smaller loans do not leave space for excessive leverage and asset-liability mismatch. “We do not give long-term loans. Also, we borrow for the same tenor and lend for nearly the same duration, which allows for timely repayment of our liabilities,” Iyer explained. Unlike banks, the fund-raising options for a non-infrastructure NBFC are limited and borrowings from banks cannot be for a very long tenor,” he added.
Equal tenor of borrowings and disbursals helps in maintaining a steady business, with little gap between time of receipt from customers and time for debt repayment to creditors.
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Housing Development Finance Corporation (HDFC), the largest mortgage lender in the country, saw a decline in its gross NPA ratio over the last nine quarters. Similarly, the smaller players are treading the same path. Gross NPAs of Mahindra Finance were down to four per cent in the second quarter this financial year, from 5.8 per cent during the same period last year. Future capital’s gross NPA ratio also fell steeply to 0.5 per cent from 2.6 per cent during the reporting period.
Curtailing loan to value and growing incomes of semi-urban and rural customers has also helped set-off the negative impact of the rate increases by the Reserve Bank of India (RBI). Cash flow in the hands of customers has been able to offset interest rate costs to a certain extent, top officials of NBFCs said. “Earlier, customers would ask for financing of assets up to 70 per cent of asset price. Now, we see that they ask for 60-65 per cent on an average,” Iyer said.
Even credit rating agencies are positive on their outlook. “We do not see any weakening in the credit profile of NBFCs, as their recovery mechanism is very efficient and they operate on a very different model from banks,” said Ramraj Pai, director, Crisil ratings.
RBI has increased the repo rate 13 times since March 2010, which has increased the cost of funds for banks, which in turn has increased the borrowing costs of NBFCs.
Technological up-gradation for better debt recovery is also one reason these firms have been able to move against the downward current. “We have invested very deep in technology to ensure timely action as part of our risk management framework,” said Rajeev Jain, CEO, Bajaj Finance.
However, infrastructure NBFCs might see their asset quality deteriorating condition of the infrastructure due to policy glitches, power shortage and moderation in growth. However, cautious lending to projects is helping these firms to tide over the asset quality concerns.
“We are lending to projects that already in operation and doing a comprehensive analysis before lending. We are going slow on new start-ups in the sector,” said Y M Deosthalee, chairman and managing director L&T Financial Holdings.
NBFCs have been able to leverage technology much ahead of the public sector banks that form a major part of the banking sector.