Will Strains Within The NBFC Sector Hurt The Flow Of Funds To The Economy?

Where banks feared to tread, non-banks rushed in. That was the story playing out in the Indian financial sector over the last two years.

Large banks, grappling with bad loans and low capital levels, retreated to the safest corners of the lending market, in turn, creating space for non-banking financial companies to grow. That, together with comfortable liquidity and greater regulatory flexibility, meant that NBFCs captured a significant share of incremental lending over the last two years.

Now as rates rise and liquidity tightens, analysts expect NBFC lending to slow down. This, in turn, would hurt the flow of funds to some segments of the economy.

According to data put out by Morgan Stanley, in FY17, 54 percent of the incremental loan growth came from NBFCs. Last year, 42 percent of the incremental lending in the system came from NBFCs. The share of NBFCs in outstanding credit rose to 12.6 percent at the end of FY18 compared to 10.8 percent two years ago, Morgan Stanley data showed.

There were five buckets within the Indian financial sector, explained Neelkanth Mishra, chief India economist and strategist at Credit Suisse in a recent interview with BloombergQuint. These were large PSU banks, small PSU banks, private corporate lenders, private retail lenders and NBFCs. Of these, NBFCs and private retail lenders were growing the fastest.

The current strain in NBFCs could reduce the flow of credit from this segment, hurting the flow of financial resources to the economy, Mishra explained. The banking system’s capacity is constrained so they may not be in a position to pick up the slack, he said while adding that banks also do not have the flexibility on products that NBFCs do.

The impact of higher rates and lower availability of refinancing would impact segments where NBFCs have been gaining market share. The impact, however, would be less pronounced in segments such as housing finance, where any gaps in the market can be relatively easily filled by banks.

Segments, where NBFCs have been gaining share of incremental lending, include small-ticket personal loans, housing loans and loans against property, shows data collated by BloombergQuint from credit bureau CIBIL’s latest consumer credit trends report.

There will be some slowdown if liquidity to NBFCs is not available at the same level as in the past, said Rajiv Sabharwal, Managing Director and CEO, Tata Capital. Cost of funds has moved up, money is available but at higher interest rates and lenders are moving towards higher quality credit, Sabharwal told BloombergQuint.

Mortgage Loans

NBFCs, including housing finance companies, have seen their share of incremental mortgage lending rise by 7 percentage points over the last two years.

In the first quarter of 2018, NBFCs, including HFCs, accounted for 48.1 percent of the aggregate sanctioned amount of loans, shows CIBIL data. This is an increase from the 43.9 percent in the Q1 2017 and 41.1 percent in Q1 2016.

To be sure, some of the larger HFCs are backed by strong parentage and may not run into difficulties in refinancing. Also, on Monday, the National Housing Bank stepped up the availability of refinance for HFCs to Rs 30,000 crore from Rs 24,000 crore earlier. On Tuesday, SBI said it would increase its target for purchasing portfolios from NBFCs.

Loans Against Property

Analysts say that segments like loans against property, where a fear of defaults has lurked in the backdrop, could be among the segments where funding availability slips. Such loans have often been used as small business loans even though they fall under the housing loans segment.

According to CIBIL data, NBFCs had a 56 percent share of the origination amount in this segment in the first quarter of 2018, compared to 52 percent in the year ago quarter. NBFC share in terms of volume was even higher at 73 percent in Q1 2018 compared to 67 percent earlier.

This segment has already seen a rise in delinquencies, which give NBFCs an additional reason to be cautious.

Auto Loans

In the auto loans segment, the share of NBFCs in disbursement stood at 57.6 percent in the first quarter, compared to 42.9 percent in the year ago quarter. Their share of the volume of loans given out stood at a higher 58.3 percent, shows the CIBIL data.

The auto loan segment, however, is an intensively competitive one with most banks looking to grow their books in this segment. As such, disruption in the availability of auto finance may be limited.

Personal Loans

Smaller ticket personal loans, where NBFCs have been active, could see some drop in availability of financing. Banks, while significant participants in this segment, are present in the mid and high-ticket loans segment.

For smaller ticket loans, the volume share held by NBFCs stood at 62 percent in the first quarter of 2018, compared to just 31 percent in the Q1 2017 and 21 percent in Q1 2016. The CIBIL report did not provide the NBFC share of disbursements in this segment.

“NBFCs have started focusing on the bottom end of the ticket size spectrum especially loans below Rs 20,000...As a result, the NBFC segment average ticket size has consistently declined from Rs 18,300 in Q1 2017 to Rs 11,900 in Q1 2018,” said the CIBIL report.

SME Loans

In the SME loans segment, while traditionally strong PSU banks have lost market share, the slack has been picked up more by private lenders rather than NBFCs.

A separate report from CIBIL showed that NBFCs held 11.3 percent of the market of SME loans compared to 9.6 percent a year ago.

Sabharwal, while commenting on the broader environment, noted that demand for credit in most of these segments remains strong. As such, if liquidity conditions smoothen out, the current concerns may turn out to be ‘blip’.

Flow Of Financial Resources

From the perspective of the broader economy, economists feel that the overall flow of financial resources to the economy needs to be monitored.

According to the RBI’s monetary policy report, flow of financial resources jumped sharply in the first half of the current fiscal compared to last year. The increase was more notable in the funding from non-bank sources. In particular, the issuance of commercial paper jumped five times during this period, said the RBI.

Should commercial paper issuance slow down, the flow of credit either via NBFCs, which were raising CPs for onlending, or directly through the bond markets, could slow.