Growth in outstanding bank loans to non-bank financial corporations (NBFCs) slowed significantly year-on-year in 2021, according to data released by the Reserve Bank of India (RBI). Industry executives said the phenomenon is the result of the drying up of credit to small NBFCs amid increased caution on the part of banks.
Outstanding loans to non-bank lenders have grown below single digits for much of the current year, with banks’ NBFC portfolio actually declining 2.2% year-on-year in June 2021. The Growth rate returned to positive territory in July, although it remained at a muted 0.5%. This contrasts with the growth rates of 20-36% seen each month during the comparable period of 2020, when the pandemic first erupted in India.
NBFC industry executives have said liquidity is not an issue for large players, but smaller lenders have struggled to access bank loans. Ramesh Iyer, vice president and general manager of Mahindra & Mahindra Financial Services, told FE it was necessary to look at the situation of the smaller NBFCs to put things in perspective. “I have heard that the small NBFCs are not able to get money from the banks. This could be one of the reasons (why credit growth is slower), ”he said.
Bankers admit in private conversations that they are cautious when lending to certain NBFCs, especially those that have encountered collection difficulties during the pandemic. “Last year the banks were cautious because of Covid, but later we saw that the NBFCs were able to do well. The second wave made it difficult again as collections were hit hard, ”said a senior executive at a public sector bank.
Banks and non-bank lenders reported deterioration in asset quality during the April-June quarter in loan categories where inflows predominate. Gold loans, commercial vehicle (CV) loans and microfinance saw slippages in the first quarter of fiscal 22, as the second wave of Covid-19 hampered the fundraising effort. There was also no moratorium on repayments, unlike in 2020, which made the stress more evident on lenders’ books.
In a recent presentation, analysts at India Ratings and Research said a trend of consolidation and polarization was emerging in the NBFC segment, with AA + NBFCs and above-rated NBFCs increasing their assets under management (AUM ) much faster than non-bank rated A +, A and A-. In terms of asset classes, real estate-focused NBFCs have seen their assets under management stagnate due to a funding crunch and other industry-specific challenges. In the first quarter of FY22, retail NBFCs also saw a decline in assets under management largely due to the second wave of Covid.
The rating agency also expects the funding environment for small microfinance institutions (MFIs) to remain challenging. “For most large MFIs (assets under management over Rs 5,000 crore or supported by a large sponsor), bank funding lines may continue and therefore they may not face liquidity stress. immediate. That being said, small and medium MFIs are expected to conserve liquidity and therefore their disbursements could be limited, which could cause their performance to lag, ”India Ratings analysts said.