Eco Survey reflects grim picture of NBFCs

The Economic Survey 2019 tabled in Parliament on Thursday reflected on a grim picture of India's shadow banking -- that has been hit by multiple problems.

All the vital indicators of the sector worsened in the bygone financial year, according to the data provided in the survey.

At the end of December 2018, Capital to Risk (Weighted) Assets Ratio (CRAR) of non-banking financial (NBFC) sector worsened to 22.2% from 22.8% at end-March 2018, the survey revealed. The gross non-performing assets (GNPA) ratio of NBFC sector deteriorated to 6.5% as in December 2018 from 6.1% in March 2018, it added.

The net NPA also increased marginally to 3.6% in December 2018 from 3.2% in March 2018. The return on assets (RoA) of the sector stood at 1.4% in December 2018 compared with 1.6% in March 2018. The RoE decreased to 6.1% in December 2018 from 7.0% in March 2018.

The NBFCs experienced difficult times in 2018-19 in the aftermath of the ratings downgrades and default of IL&FS Group. The liquidity problems in India's shadow banks persists to date, resulting out of asset-liability mismatch. There are atleast six other NBFCs that have been facing liquidity issues -- with Dewan Housing Finance Limited (DHFL) anxiously negotiating a bailout package for itself.

NBFCs depend largely on public funds which account for 70% of total liabilities of the sector. Bank borrowings, debentures, and commercial paper are the major sources of funding for NBFCs. The debt market in India is staring at a crisis looming overhead, as 48% of the non-convertible debentures (NCDs) in India have been issued by the NBFCs.

Immediately after the IL&FS crisis, NBFCs faced severe liquidity crunch as mutual funds (MFs) stopped refinancing the loans of NBFCs. "However, the government
moved in quickly and took immediate measures to ringfence the problem and
limit contagion. Consequently, the flow of resources from the banking sector to NBFCs improved for some time," the survey said.

However, the flow of resources from the banking side has contracted since November 2018. In fact, deployment of funds by MFs has turned negative and stood at -12% in April 2019.