The double-digit growth witnessed by India’s non-bank financiers in the September and December quarters despite the pandemic shows the sector’s resilience, said an article published in Reserve Bank of India’s (RBI) May bulletin.
Written by Nandini Jayakumar, K M Neelima, and Gopal Prasad, from the RBI’s Department of Economic and Policy Research, the article was accompanied by the usual disclaimer that views expressed are those of the authors and do not reflect the views of the central bank.
“The consolidated balance sheet of non-banking financial companies (NBFCs) registered a year-on-year (y-o-y) growth of 13% and 11.6% in Q2 and Q3 2020-21, respectively. This deceleration compared to corresponding quarters of 2019-20 could be attributed to the covid-19 induced economic slowdown and weak demand,” it said.
The authors qualified this statement by pointing out that this double-digit growth in an adverse macroeconomic environment shows NBFCs were able to cushion the impact through quick adoption of technology, policy support and reasonably strong fundamentals.
India’s non-bank lenders have been plagued by a liquidity crunch since a series of defaults by Infrastructure Leasing & Financial Services (IL&FS) in September 2018. RBI, the article said, strengthened its regulatory oversight over the sector, and NBFCs also took proactive steps in correcting asset-liability mismatches.
“NBFC credit grew even after the IL&FS default, albeit at a slower pace, aided by bank borrowings and supportive policy measures. However, just as the NBFC sector was finding its bearings, the covid-19 pandemic struck and exacerbated the challenges faced by the sector,” it said.
Following the IL&FS debacle, the sector began correcting its asset-liability issues. While term loans growth remained high at 22.6% and 18.3% in Q2 and Q3 of FY21, respectively, it showed a gradual deceleration from March 2020. On the other hand, absolute issuance of commercial papers by NBFCs continued to decline in Q2 and Q3 and over 70% of the NBFC borrowings are payable after 12 months and their share has remained stable, indicative of the growing market discipline, the authors said.
Loans and advances constituted around 71% of the total assets of the NBFC sector in the December quarter and continued to be the largest component on the asset side of NBFCs’ balance sheet. Non-bank financiers posted 4.8% and 2.5% credit growth in Q2 and Q3, respectively.
“Loss of income and livelihoods and subsequent fall in consumption demand as well as discretionary spending resulted in NBFCs’ credit growth remaining in modest zone in contrast to their usual robust trend,” it said.
The authors also said that the industrial sector remained the largest recipient of credit from non-deposit taking systemically important NBFCs even as its share moderated between Q3 of FY20 and Q3 of FY21.
“Retail sector, followed by services, are the other major beneficiaries and their share grew during the period under consideration,” the article said, adding that the industrial sector, particularly micro and small and large industries, seemed the worst hit by the pandemic as they posted decline in credit growth.
Imposition of lockdown, abrupt stoppage of economic activities and disruption in supply chains to contain the spread of the virus could have affected these sectors the most, it added.
According to the article, 5.3% of NBFC loans were bad as on 31 December, as compared to 5.8% in September and 6.2% in June. It said that the true extent of bad loans in the sector may be gauged in the upcoming quarters as the interim order by the Supreme Court on asset classification standstill was lifted in March 2021.
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