The latest changes in the trend of liquidity challenges has resulted in a steady growth of NBFCs (Non-Banking financial Companies) over the past few fiscals. This means, the interest rates and borrowing costs have started swinging and has resulted in the funding challenges of NBFCs.
- Measures by the Government of India, Reserve Bank of India and National Housing Bank though has changed the position, still the NBFCs continue to face the challenges.
- The third quarter of the fiscal saw cutting down of disbursements by 20% to 40% by the NBFCs and this is expected to result in halving of Asset Under Management growth for the second half of the Fiscal.
- Annualized growth of NBFCs in the first half of this fiscal was a healthy 20% which was similar to the 18% compound annual growth observed between fiscals 2014 and 2018.
- The reason attributed is to their Excellent customer relationship, adaptability, local knowledge, and innovative thinking. Further, it is seen that there may not be any major change in their share of overall financial system credit which rose by 500 basis points (BPS) during 2014 to 2018.
- With an improved funding position, retail asset classes are expected to show steady growth.
- Though the impact on vehicle finance and Home Loans is expected to remain unaffected, no relief is expected from the competitors more so from the Private Sector Banks and also large PSU Banks.
- The expected results are:
- The wholesale lending has been one of the growth areas in the recent days for the NBFCs which is expected to slow down.
- Asset quality would get affected.
- Delinquencies could increase due to a decrease in the credit flow
- There has been a crunch in the Small and Medium size loans especially under LAP (Loan against properties) which has seen a crunch over a period.
- A structural shift in the liquidity and liability management of NBFCs is expected.
- The quantum and quality of liquidity cushion would become a key differentiator in the coming days
- Low-interest rates during the period 2015-18 has led to higher short-term capital market borrowings
- This has led to a mismatch in the Asset Liability Management
- Diversified bank credits and ensuring steady access to sanctioned bank loans will be a focus point.
- Reduced dependency on short term capital market borrowings.
- Building of sound liquidity policies and structural strengthening of the sector
- NBFCs have passed through turbulent periods in the recent days, however, this has caused them short term pain, however, they have adopted to structural changes, which has made them stronger.
After a period of adjustment, NBFCs are expected to continue their key roles in the Indian Financial system.