Non-banking finance companies (NBFCs), which have helped credit reach last-mile borrowers, would likely be priority for the new administration that needs to ease access to funds for NBFCs so that India’s consumption demand and financial stability remain unaffected.
The sector has faced a credit squeeze ever since IL&FS and its units defaulted on repayment commitments, the strain being visible in the latest monthly sales charts of cars, two-wheelers and trucks.
Over-leveraging, excessive concentration, and massive mismatch between assets and liabilities have exacerbated problems for a sector that has otherwise been at the vanguard of taking formal financing to homes that remain unbanked. The sector constitutes about 15% of the balance sheet of the formal banking sector.
“A clear majority of NBFCs are in ICCU. I will be surprised if in June, the central bank and the government do not come out strongly to support the sector on a fair basis,” said Anil Ambani, chairman ADAG. “A lot of us in the sector have been asking RBI to allow us to take fixed deposits. RBI’s response has been: No.”
The government, which is returning with an even stronger mandate than that of 2014, is likely to work on enhancing the trust between banks and NBFCs. The central bank and the government could work together to improve system level liquidity, relax the rules of securitisation across asset classes, accelerate the co-origination model, and reduce the risk weight across sectors.
In February, RBI had reduced the minimum holding period for housing finance companies to 6 months from 12 months so that more assets can be securitised. Today, risk weight for a bank lending to AAA rated NBFC is 35%. It can be brought down temporarily.
Nomura said that the new government would review the regulatory framework, work with the central bank to ensure sufficient liquidity, and look to avoid grey swan events in the NBFC sector.
The government will have to take a call on converting large NBFCs into banks and giving banking/deposit-taking licenses to small, innovative NBFCs. A stable system is possible only if asset liability mismatches are lower. In the short-term, amendments in securitisation guidelines will help the sector, which has been seeking the quashing of the prescribed minimum holding period of six months and minimum retention thresholds on securitisation.
The sector wants a minimum holding period for loans with maturity of 2-5 years to be reduced from 6 months to 3 months.
While NBFCs are working toward readjusting to the new reality, most of them will take a few quarters to come out of the crisis. Financial performance of NBFCs in the March quarter has deteriorated, with cost of funds going up and loan growth slowing down.