NBFC crisis a result of inherent weakness, not just liquidity: RBI

The central bank also said that it is expanding the base of stakeholders it consults to determine the financial health of NBFCs.

Challenges faced by some non-banking financial companies (NBFCs) were reflective of their inherent fragilities rather than merely a liquidity crunch and this is evident from how markets are differentiating between non-bank lenders, the Reserve Bank of India (RBI) said in its report.

“Financial markets have been discriminating between strong NBFCs and those having perceptible weaknesses,” the central bank noted, adding that recent developments in the sector have brought greater market discipline, and better-performing companies continue to raise funds at reasonable costs. On the other hand, NBFCs with asset-liability mismatches or asset quality concerns have been facing constraints on market access and/ or higher borrowing costs.

Further, the report said that concerted policy initiatives by the RBI and the government are expected to alleviate the liquidity constraints faced by these weaker entities, as they gradually regain the confidence of the financial markets and continue with normal activity.

The central bank also said that it is expanding the base of stakeholders it consults to determine the financial health of NBFCs. “Apart from strengthening the existing four pillars of supervision viz., on-site examination, off-site surveillance, market intelligence and reports received from statutory auditors, a fifth pillar — periodic interaction with stakeholders like statutory auditors, credit rating agencies, and banks that have large exposures to NBFCs —is getting institutionalised as part of the supervisory process for monitoring the incipient build-up of risks so as to be able to take pre-emptive actions,” RBI said in the report.

Market conditions have resulted in a marked slowdown in growth at NBFCs. During 2018-19, credit flow from housing finance companies (HFCs), systemically important non-deposit taking (NBFC-ND-SI) and deposit-taking NBFCs (NBFC-D) declined. Although the NBFC sector grew in size to `30.9 lakh crore in 2018-19 from Rs 26.2 lakh crore in 2017-18, the pace of expansion was lower than in 2017-18 mainly due to rating downgrades and liquidity stress in a few large NBFCs in the aftermath of the IL&FS crisis. Over 40% of the retail portfolio of NBFCs are vehicle and auto loans.

NBFCs’ credit to commercial real estate decelerated in 2018-19, reflecting their risk aversion in light of the slowdown in real estate sector despite expansion of bank credit to the sector. “On the other hand, credit to agriculture and allied activities saw a significant increase in 2018-19, partly attributable to the policy measure of September 2018 enabling co-origination of loans for lending to priority sector by banks and NBFCs,” RBI said.