NBFC recovery still far away

The non-banking financial companies (NBFCs) which have been reeling under the stress of liquidity crunch over the past year, will continue to be under the pressure for some more time, according to a report.

The shadow banks in India have been reeling under severe fund crunch for more than a year now, after a whopping Rs 90,000 crore default by IL&FS in September 2018 revealed a very high degree of asset-liability mismatch in the sector. “There was a general consensus among participants that only the top 25-50 NBFCs are able to manage the liability side pressure; the rest are struggling to raise liquidity,” Motilal Oswal said in a research note.

Analysts believe that the fund crisis in shadow banks continues to persist. While the mutual fund (MF) sector has not been very receptive, the banks have been disbursing loans to the sector.

A gamut of factors have contributed to MFs shying away from parking money in the crisis-hit shadow banks: reduction in assets under management (AUM), tweaks in the SEBI regulation in caps for investing in the mid-cap companies.

“Until recently, there was no clear-cut insolvency management framework for financial services companies, thus making MFs hesitant to lend,” Motilal Oswal added.

Asset size shrinks

The debt mutual fund industry’s AUM has shrunk by about Rs 2 lakh crore from its peak two years ago.

On the other hand, banking sector lending to NBFCs has increased 30% year-on-year to Rs 7.1 lakh crore in H1, FY20 as the capital markets have dried up for most corporates after debt defaults engulfed India Inc.

India’s shadow banks – both government and private – account for 30% of the credit given in the country, a number which, according to experts, is likely to go down in the coming years.

However, of the 35 largest exposures in the sector, analysts believe 38% are high risk while 45% are medium risk.

Despite the headwinds, industry sources believe that a couple of measures taken by the central government – which is being blamed for reacting very late on the issue – will help in stabilising the sector.

The Partial Credit Guarantee (PCG) scheme for NBFCs, approved by the Centre last week, is expected to help in the securitisation of loans worth Rs 4,000-5,000 crore by the month of December.

The Rs 25,000 crore alternative investment fund (AIF) announced by the government for stressed realty sector is also expected to ease the woes in the shadow banks, as realty and home loans are two key areas where non-banking financial companies lend their money.

The industry is of the view that the AIF will be able to address around 30-40% of stressed projects in the real estate sector.