Economic Survey 2020: Health Score Proposed To Monitor NBFCs, Housing Financiers
A stethoscope sits on an examination table. (Photographer: Andrew Harrer/Bloomberg)

Economic Survey 2020: Health Score Proposed To Monitor NBFCs, Housing Financiers

The Economic Survey 2019-20, released by the chief economic adviser’s office a day ahead of Union Budget 2020-21, has proposed that regulators and other stakeholders begin using an index to determine the health of non-bank lenders and housing financiers.

The Health Score Index, according to the survey, can be used to identity and monitor the financial and operational resilience of non-bank lenders, depending on their “rollover risk”—or the risk an NBFC faces from frequent repricing or rolling over of their short-term debts that could raise costs, leading to credit rationing.

“Financial institutions rely on short-term financing to fund long-term investments,” the survey said. “This reliance on short-term funding causes an ALM (asset-liability mismatch) problem because asset-side shocks expose financial institutions to the risk of being unable to finance their business.”

The health score of housing financiers can be determined by:

  • ALM profile
  • Percentage of borrowings from commercial papers
  • Asset quality
  • Short-term liquidity in terms of the percentage of cash to total borrowings
  • Provisioning policy
  • Capital adequacy ratio

The health score of a retail NBFC can be determined by:

  • Average proportion of highly liquid investments
  • Percentage of borrowings from commercial papers
  • Operating expenditure ratio
  • Short-term liquidity as a percentage of cash to total borrowings
  • Ratio of commercial papers held by liquid-debt mutual funds to the total paper holdings of liquid-debt mutual funds issued by all retail-NBFCs and HFCs
  • Provisioning policy
  • Capital adequacy ratio

The metrics for determining the health of a retail-focused NBFC are different from that of HFCs, as retail NBFCs tend to provide loans at a shorter tenure.

Based on these metrics, the economic survey analysed the five larger housing financiers that had a combined loan portfolio of Rs 8.6 lakh crore as of March 31, 2019.

It found that the Health Score Index of these five housing lenders began to deteriorate soon after the real estate slowdown in 2013-14 and declined significantly from 2015.

Economic Survey 2020: Health Score Proposed To Monitor NBFCs, Housing Financiers

Similarly, the survey analysed the retail NBFC sector and found that the rollover risk isn’t always inversely related to its size, as on average, smaller-sized non-bank lenders had higher health scores than their medium-sized peers.

The annual reports of 15 private sector non-bank lenders with combined assets under management worth Rs 6.8 lakh crore as of Mar. 31, 2019, were analysed, the survey said.

The health score of small and large retail NBFCs peaked in 2016-17, but fell from then on to recover marginally in 2018-19, according to the survey. The health score of medium-sized NBFCs has historically been lower, it said.

Economic Survey 2020: Health Score Proposed To Monitor NBFCs, Housing Financiers

The survey said regulators can use the index to detect early warning signals of impending rollover-risk problems among non-bank lenders and housing financiers as a downtrend in the health score of a company can be used to trigger enhanced monitoring.

It can also be used to set prudential thresholds on the extent of wholesale funding that can be permitted for firms in the shadow banking system, it said.

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