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finance | IST

NBFCs had a stormy 2019; hope 2020 brings in more structural solutions

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It is widely agreed that NBFCs are vital part of the economy, and therefore the need of the hour is a more structural solution even if it comes in the form of something like a bad bank.

Defaults, bankruptcy, shrinking balance sheets. 2019 was a perfect storm for the non-banking finance companies, that continued to reel under the fallout of the IL&FS triggered a crisis. As per a recent Crisil report, the growth in assets under management of non-banks, including NBFCs and housing finance companies, is set to hit a decadal low of 6-8 percent for this fiscal, compared to 15 percent in FY19.
Krishnan Sitaramam of Crisil said, "NBFCs are today at a crossroads. If we look from Sep 2018 post the IL&FS default, they have been facing funding challenges. NBFC sector was growing at a very sharp pace till pre-Sep 2018 at CAGR of 18 percent- that will come down this year to about 6-8 percent largely because of funding access challenges."
"Along with funding access, the other key issue that is coming up is investor concerns about asset quality. We are seeing asset quality inching up on various retail segments but not at alarming levels. What is a concern is asset quality deteriorating on the wholesale asset book which is largely real estate developer funding. And the key reason there is that many loans there are under moratorium and as and when they come out of moratorium, we expect to see NPAs go up given the stress real estate developers are facing," he added.
According to Crisil, non-banks will continue to play a significant role in overall credit delivery. However, their share in the credit pie- which now stands at about 18 percent- could drop by at least 1 percent over the next two fiscals, even as total credit is expected to grow from Rs 129 lakh crores to Rs 170 lakh crores. 
The latest data from the NBFC industry body finance industry development council shows that for the quarter ended September, NBFC industry sanctions fell by an average 34 percent over the last year. In absolute terms, total NBFC sanctions fell to Rs 1.9 lakh crore at the end of September from Rs 2.9 lakh crore during the same period last year. While rural sanctions fell by 11 percent, NBFC sanctions in urban areas saw a 41 percent decline over the previous year.
Industry players, however, remain optimistic.
Rashesh Shah of Edelweiss expects NBFCs to return to 18-20 percent growth by FY22 if things stabilise.  "NBFCs were growing at about 25 percent a year for the past 5-6 years which was great for the economy because the banks had slowed down but the NBFCs were keeping the credit cycle going. Last one year the NBFCs might end up at either flat to -5 percent growth for FY20. I think NBFCs will be back to 13-14 percent growth for FY21 and if things stabilize then at about 18-20 percent by FY22," Shah said. 
The government and the regulator have both taken a number of measures to support the NBFC sector through this crisis period.
Some of the key measures include systemic liquidity infusion, easier securitisation norms, according “priority sector” tag for bank credit to NBFCs, partial credit guarantee enhancement guarantees for public banks buying assets from NBFCs, increasing exposure limits for banks’ lending to single borrower NBFCs, even a fund to buy out stressed real estate assets that are the reason for a bulk of the stress among NBFCs.
Even more important has been the introduction of a special window under the insolvency and bankruptcy code where stressed NBFCs​ with over 500 crores of asset size can be sent for resolution… and DHFL is the first test case under this mechanism.
While the impact of these measures is yet to be seen, RBI says it is keeping a close watch of the shadow banks to ensure there are no more shocks to the system. Shaktikanta Das, RBI Governor, told CNBC-TV18 in an interview earlier, "After the failure of the IL&FS, NBFCs have been under stress. The RBI is very much concerned about it. It is a matter of concern and we are keeping a close watch. We are monitoring about 50 top NBFCs including a few HFCs which cover roughly about 70-75 percent of the loan outstanding of the banks and there are a few NBFCs where we are doing a further deep dive to see exactly what is happening in that NBFCs and we have been our supervision and our RBI team, wherever required they are tough with the promoters and with the management of the NBFCs to see that the repayment obligations and other things are maintained. We are keeping a close watch."
What’s next for the NBFC sector?
 
Depending on who you ask, it could be an inflection point where only the fittest survive or just a blip that could reverse in a few quarters. What is widely agreed upon, however, is that NBFCs are vital to the economy, and with stress not dissipating immediately, a more structural solution is needed to address the issue, even if it comes in the form of a bad bank.