Consumer loans may be the next big headache for NBFCs: RBI report

Gross non-performing assets (NPAs) of non-banking financial companies (NBFCs) have risen from 5.8 per cent in 2017-18 to 6.6 per cent of their loans in 2018-19 even as net NPAs declined by 10 basis points from 3.8 to 3.7 per cent in the same period, the Reserve Bank of India’s (RBI’s) Financial Stability Report has said.

Moreover, the capital-to-risk weighted asset ratio (CRAR) of NBFCs hovered around 19.3 per cent as of March this year compared to 22.8 per cent in the same month last year.

With gross NPAs on the rise, the consumer loans segment may become a new headache for NBFCs.

NBFCs are facing the highest delinquency levels in all the sub-segments of consumer loans except for loans against property.

The report says: “A look at the evolution in delinquency levels in each of the segments shows that NBFCs as a group have been leading delinquency levels in almost all the sub-segments of consumer credit (except in loans against property where it stands a close second to PSBs) when uniform delinquency norm of 90 days past due (dpd) is applied”.

A major thing highlighted in the report is that the dependence of NBFCs on banks for funds is increasing whereas reliance on commercial papers and debentures has seen a decline after the Infrastructure Leasing and Financial Services (IL&FS) crisis.

The report said: “Bank borrowings to total borrowings have increased from 21.2 per cent in March 2017 to 23.6 per cent in March 2018 and further to 29.2 per cent in March 2019.”

During the same period, the dependence on debentures declined from 50.2 per cent in March 2017 to 41.5 per cent in March 2019.

The main sources of borrowing for NBFCs and housing finance companies (HFCs) are banks, mutual funds, commercial papers, and non-convertible debentures.

This means banks are compensating for the reduced market access for NBFCs amid the prevailing liquidity crisis. The report says the share of non-mortgage loans for the top five HFCs rose from 29 per cent to 46 per cent.

Consumer loans may be the next big headache for NBFCs: RBI report

Moreover, the stress test of NBFCs indicates 8 per cent of them won’t be able to comply with the 15 per cent minimum capital requirement and in the worst case scenario 13 per cent will fail to comply with it.

The sector came under stress after Infrastructure Leasing and Financial Services (IL&FS) defaulted on its debt obligation, exposing the asset-liability mismatch in the sector.

The top 10 NBFCs account for more than 50 per cent of banks’ exposure to the sector while the top 30 NBFCs (including government-owned NBFCs) account for more than 80 per cent of the exposure, the report said.

However, the report says over-reliance on bank funding makes NBFCs, especially housing finance companies, uncompetitive in financial products where the sector has to compete with banks and in such circumstances, NBFCs’ portfolio choices may tend to have an adverse selection bias.

Moreover, funding with private debt has implications for NBFCs’ profitability while inducing an interest rate mismatch in key product segments where NBFC products are (notionally) benchmarked to money market rates for competitive reasons.

The silver lining amid the crisis, the report says, is that after the IL&FS episode, the sector has come under greater market discipline. Better-performing companies continue to raise funds while those with asset-liability problems have been suffering due to high borrowing costs.

The report emphasised the need for greater surveillance of large NBFCs and HFCs because the failure of any of these will cause losses equivalent to that of the failure of a big bank.