NBFCs hope to come out of deep, dark tunnel in 2020

The crippled non-banking financial companies are hoping for better days in the New Year as they expect liquidity conditions to improve on the back of various measures announced by the government and the Reserve Bank.

Asset quality pressures, liquidity squeeze, asset-liability mismatches, higher borrowing costs, rising defaults levels, and rating downgrades made 2019 a tumultuous year for NBFCs or the shadow banks.

Having badly lost a year and more since the industry major IL&FS went belly up in September 2018, NBFCs expect that the fiscal and monetary measures will help them come out of the deep tunnel, and to regain their lost importance in the financial system as they have been the key financial intermediaries delivering the last mile credit to the needy all these while.

"The outlook is positive as the government and the RBI have already announced a lot of measures to help the NBFC sector," says Shriram Transport Finance Managing Director Umesh Revankar.

To alleviate the stress in the sector, the government and RBI announced several measures such as allowing banks to provide partial credit enhancements to bonds issued by NBFCs, relaxing the minimum holding period to encourage loan securitisation.

Other measures include end-use restrictions on external commercial borrowings, loan co-origination with banks, the introduction of liquidity coverage ratios and a one-time partial credit guarantee scheme, among others.

The amendments to the RBI Act gave the central bank the powers to strengthen governance at NBFCs to protect depositors/creditors' interest and secure financial stability. The law empowered the RBI to remove the directors of NBFCs; supersede their boards and appoint administrators to improve governance and protect the interests of depositors and creditors.

After the collapse of IL&FS, which owes close to Rs 1 lakh crore to the system, the NBFC sector witnessed third-largest mortgage lender Dewan Housing Finance (DHFL) going belly up, putting at risk close to Rs 1 lakh crore of lenders, bondholders and fixed depositors.

Ironically, DHFL has become the first NBFC/housing finance company to be sent to bankruptcy following an amendment of section 227 of bankruptcy code mid-November.

There were delays in repayment of debt instruments by a few other NBFCs namely Altico Capital, Religare Finvest and Reliance Home Finance during the year.

To stop any other big NBFC from collapsing, the RBI started keeping a close vigil on the top 50 NBFCs, representing 75 per cent of the asset size of the sector.

"I can say with some amount of confidence that we have a fairly good idea of where the vulnerabilities lie, which are the vulnerable NBFCs, and we are monitoring them very intensively," RBI Governor Shaktikanta Das had told reporters after the December 5 policy review.

"And, the Reserve Bank, wherever necessary, will not hesitate to act to ensure that we do not allow any large or systemically important NBFC to collapse," Das assured.

But everybody is on the same page in blaming the government and the RBI for underestimating the gravity of the problem and let the crisis to blow up.

The asset quality of NBFCs deteriorated through 2019, with their gross non-performing assets increasing to 6.3 per cent as in September 2019 from 6.1 per cent in March 2019, according to the latest Financial Stability Report of the RBI. Their Net NPA ratios, however, remained steady at 3.4 per cent between March and September 2019.

A major collateral damage was the NBFCs' ability to tap the market to raise capital as the crisis has dented investor confidence in the sector, forcing them to rely more on banks for their funding requirement.

As of September 2019, the share of bank borrowings in NBFCs' total borrowings of Rs 19.04 lakh crore increased to 26.9 per cent at Rs 5.13 lakh crore.

"We never shied away from lending to NBFCs through various modes like pool buyout or on-lending. We will continue to fund NBFCs with good ratings and who are able to manage their asset liability mismatches," says the head of a public sector bank.

Rating agency Crisil in a recent note said the assets under management of NBFCs may fall to a decadal low of 6-8 per cent in FY20 compared to around 15 per cent last fiscal.

This de-growth will be on account of the rising borrowing costs, de-risking of loan books and a slowing economy, Crisil said.

But many other sector observers, however, feel the liquidity stress may continue for one more year in absence of a refinance window.

The sector has been asking a special refinance window to meet their cash need but the government has so far not given in to their demand.

"The importance of NBFCs cannot be ignored. They are the providers of the last mile funding and hence their need for credit must be taken care of," admits a banker.