NBFC Assets To Shrink The First Time In 20 Years, Says Crisil

Non-bank lenders’ assets are expected to contract the first time in nearly two decades, according to Crisil Ltd., as the nationwide lockdown to contain the pandemic stalled fresh disbursals.

Assets under management for the NBFC industry are expected to shrink 1-3% by March 2021, according to a Crisil report. Barring the top five non-banking finance companies, the asset base will contract by a sharper 7-9%, the rating agency found in the study that included housing finance companies but excluded state-run non-bank lenders.

Lower repayments during the loan moratorium period (March 1 till Aug. 31.) and capitalisation of interest accumulated will help limit the contraction for NBFCs, according to Crisil. But, even after the lockdown is lifted, Crisil said disbursals by non-bank lending industry will likely face four major hurdles:

• Challenging macroeconomic environment that would curb underlying asset sales.
• Sharper focus on liquidity, as incremental funding is not easy for many NBFCs.
• Stiff competition from banks as funding costs for many NBFCs remain relatively high.
• Tightening of underwriting standards by NBFCs amid weak economic activity and expectations of increasing delinquencies.

While disbursements are expected to fall 50-60% this year, reduction in the assets under management will differ by segment, according to Krishnan Sitaraman, senior director at Crisil Ratings.

The analysis of the largest segments of the NBFC assets pie shows that most segments could witness contraction in the current fiscal, he said. The silver lining, however, would be gold loans that constitute about 5% of the AUM, he said. The rise in gold loans will largely come from individual borrowers and small businesses for immediate financing needs, he said.

Fundraising for NBFCs is likely to remain a drag during the fiscal as the financial system is going through a confidence-sensitive phase, with funding costs continuing to be high.

“Despite the decline in interest rates over the past six months, the funding cost for NBFCs has remained relatively high because of risk aversion among investors and lenders,” said Ajit Velonie, director, Crisil Ratings. Public and private sector banks, flush with liquidity, will look at sharpening their focus in the retail lending segment, especially housing and vehicle finance, he said.

In the real estate and structured finance segments, NBFCs have been catering to borrowers at the project stage, where banks do not have a major presence. As for micro, small and medium enterprises, especially loan against property, and the unsecured segments, even banks are expected to be cautious. As a result, NBFCs could still find a footing in the second half of the current fiscal, Crisil said.

NBFCs with strong parentage or those that are part of large corporate groups, accounting for about 70% of sectoral assets under management, should continue to fare relatively better on the fundraising and disbursement fronts.

Non-bank lenders have navigated extended stress periods in the past, Crisil said. That experience, according to the rating agency, along with their core strengths of customer relationships, adaptability, local knowledge, innovation and responsiveness will be supportive as they attempt to tide over the challenges.