Navigating a raft of headwinds for over two fiscals – culminating in de-growth in the current fiscal – assets under management (AUM) of non-banking financial companies (NBFCs)¹ is set to grow again – although at a relatively subdued 5-6% next fiscal. The turnaround will be led by larger entities with stronger parentage².

After a stellar growth of 18% per annum in AUM between fiscals 2014 and 2018, the pace decelerated to a stutter since the credit event of September 2018. This was primarily due to funding access challenges, followed by asset quality worries due to the Covid-19 pandemic this fiscal. However, recent months have seen some green shoots.

Says Gurpreet Chhatwal, President, Crisil Ratings, “Despite an estimated GDP growth of 10% next fiscal, overall NBFC sector growth is likely to be slower because access to funding remains a challenge due to concerns about the impact of the pandemic on asset quality. Additionally, competition is expected to be more intense from banks – which are flush with low-cost deposits and better placed with improved capital buffer than in the previous years.”

The challenges faced by NBFCs in gaining funding access at optimal costs will mean they cede overall market share to banks in the near term, especially in their two biggest segments – home loans and new vehicle finance.

While growth would be a challenge in the near term, the most important monitorable would be how asset quality pans out as we approach the next fiscal. The trend in monthly collection efficiency ratio³ (MCR: unadjusted for moratorium) till November shows a marked improvement, especially in vehicle finance segment. However, three months after moratorium, there is still some way to go before collections reach pre-pandemic levels. Also, the higher MCR is attributable largely to overdue and advance collections, while current collection remains below pre-pandemic levels.

Crisil estimates the stressed assets {gross non-performing assets (GNPA) + potential stress in loan book} as on September 2020 for the overall NBFC sector at Rs 1.6-1.8 lakh crore which translates into ~6.5-7.5% of industry AUM. Given the macro-economic challenges that the country is navigating through, GNPAs are expected to increase across almost all asset segments with gold loans and home loans seeing the least impact.

On the liabilities side, dependency on banks for incremental funding remains high. The government and regulators have provided some relief in the form of regulatory interventions such as Targeted Long Term Repo Operations, Partial Credit Guarantee and Special Liquidity Scheme, which have partially aided fund raising. But here, too, the investors are the banks.

The debt capital markets and securitisation route, big sources of incremental funding for NBFCs till fiscal 2019, have been subdued as investors are still waiting to see sustained track record and consistency in collections.

Says Krishnan Sitaraman, Senior Director, Crisil Ratings, “From a funding perspective, for larger NBFCs, the challenge is primarily their ability to fund balance sheets beyond a certain size purely through wholesale liabilities. Here, conversion to a bank does provide benefits, but over the long run. For the small to mid-size NBFCs and large standalone ones, funding access challenges continue so the imperative is to raise confidence capital, ensuring stringent underwriting quality to avoid asset-quality surprises, and build partnerships with banks to develop a funding-light business model.”

However, the NBFC sector has weathered a number of storms in the past by leveraging its core strengths of customer relationships, adaptability, local knowledge, innovation, responsiveness, and last-mile connect. That experience, and their ability to manage asset quality, liquidity and capitalisation, will be key to their growth prospects in the medium term.

¹ Comprising both non-banking finance companies and housing finance companies
² Non-banks that are backed by strong corporate groups / parents or having a bank in the group.
³ Monthly Collection Efficiency = Total collections (excluding foreclosures)/Scheduled billing (unadjusted for moratorium)