NBFC Crisis

According to CRISIL Report, the Assets under management (AUM) of non-banking financial companies (NBFCs) are expected to de-grow 1-3% in the current fiscal as fresh disbursements drop sharply. Excluding the top 5 NBFCs, the de-growth is expected to be even sharper at 7-9%.

The Story

There has been a difference between Banks and NBFC’s. While regular banks are responsible for a lot of things— including savings accounts, cheques, credit lines, Loans, etc, Non-Banking Financial Corporations specialize in certain niche areas and catering to customers that have been ignored by traditional banks.

Mannapuram finance specializes in gold loans, Bajaj Finance in consumer loans, India Bulls in housing loans, and this defining feature has allowed them to occupy a special place in the banking industry.

However, considering almost all NBFCs are non-deposit taking, they are not subject to the same stringent RBI regulations that govern most banks and this exception has allowed them to grow at a blistering pace over the past few years

Unfortunately, all growth comes at a cost.

On September 4th, 2018, IL&FS, one of the largest NBFCs in the country, broke the cardinal rule of the Banking Industry. It defaulted on a series of repayments and confessed that it had run out of money.

The ensuing tremors shook up an entire industry. Many small and mid-sized NBFCs went bust. Even the big ones — most notably, DHFL went belly up within just one year.

The point here is this — NBFCs have been under deep waters for a while and move by the government of India to enforce a nationwide lockdown, the crisis has truly undergone into a systemic problem for the entire banking industry.

Well, you might have heard this many times “NBFC is facing liquidity issue” and we are going to repeat the same one more time saying that the NBFC business model is flawed. It relies on short-term funds which are then lent out as long-term loans. This leads to a situation called an asset-liability mismatch.

For example, an NBFC raises money by selling 6-month debt papers (primarily from Banks) and lends this as a car loan to customers with a  tenure of 5 years. Cleary you have to manage rollover 10 times for the same loan and situations like ILFS just stop this party.

IIFL Finance and Edelweiss Financial Services want to completely exit the wholesale loan business in the next couple of years by down selling these assets

In the current environment, there is cut-throat competition from banks, especially in the traditional asset classes such as home loans and vehicle finance, as banks are flushed with surplus liquidity and their focus will be on these asset classes which are considered safer bets. With banks sharpening focus on retail loan products, NBFCs are expected to lose share, especially in the housing and vehicle finance segments

As the financial health of NBFCs deteriorates due to more loan losses, they will have greater difficulty obtaining funding, which will exacerbate their funding constraints. Which ultimately will lead to a reduction of market share

We will have to wait and watch for months for Green Shots in the Economy and NBFC Space

Until then

Published By: akash On 03/1/21 7:23 AM