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VisionRI - Urban Development


PTI mumbai India
Updated: 08-11-2018 14:04 IST

The ongoing crisis of confidence

in non-banking financial companies (NBFCs) may prove to be a

drag on economic growth, as balance sheet constraints and

higher funding costs may prompt these shadow banks to slowdown

lending, warns a report.

But this will come as a growth booster for banks,

which for long have been ceding credit market share to NBFCs,

which had accounted for 12-15 per cent of the total credit

generated in the past two fiscals.

Warning that lower credit availability from NBFCs will

hurt growth, Singaporean lender DBS' economist Radhika Rao

said, "the likelihood of stricter lending controls on NBFCs

and tougher operating environment is likely to impinge on

their ability to expand their books, prompting them to scale

back their aggressive growth a result overall

credit availability is likely to moderate, which in turn will

be hurting growth."

However, the slower growth can reduce the asset

quality concerns, if incremental funding is deployed in

quality loans rather than high risk loans.

The difficulties faced by NBFCs, which for long

have been credited for deepening credit flow to pockets where

banks have not been able to operate, poses a "downside risk"

to DBS' FY19 GDP growth estimates of 7.4 per cent and 7.8

per cent the fiscal later, she said.

The other headwinds for growth include higher rates,

lower fiscal headroom and sub-par private sector spending.

Share of NBFCs in financing mciro, small and medium

enterprises has risen to 11.3 percent as of mid-2018 against

8.4 percent two years prior. By comparison, public sector

banks' share came down massively during this time to 51

percent in June 2018 against 60 percent two years ago.

Non-banking finance companies have been hit badly

following the defaults by IL&FS since September, leading to a

deep funding squeeze by banks on one hand and lack of investor

appetite for their debt instruments on the other.

This has resulted in higher credit disbursal by banks

in October to 14.4 percent from 12.5 percent in September.

This is because many NBFCs have been shifting from

capital/money market borrowings to bank borrowings,

particularly those with unutilised/undrawn credit lines.

On the other hand, NBFCs have also sought more credit

line from banks as cost of markets-based borrowings ticked up,

leading to a 44 percent spike in such loans since August,

she said.

"We continue to look for banks to increase their

market share as a primary source of funding to commercial

sector, as balance sheet constraints and higher funding costs

prompt NBFCs to slow lending activity," Rao said.

As funding costs rise, NBFCs' liabilities are likely

to get repriced more than assets particularly shorter-tenor

borrowings, posing refinancing challenges.

Though larger NBFCs can still manage their costs by

tapping public issues, smaller ones will find it a challenge

to seek alternate sources of funding, which will impact their

margins, forcing them to restrain balance sheet expansion.

At the same time, banks will not be able to meet all

the displaced funding demand because at least half of the

public-sector banks are ring-fenced under the prompt

corrective action framework by the RBI, which restricts them

form fresh loans, crimping overall credit availability.

Secondly, NBFCs, particularly those specialised in

microfinance, housing, auto finance, rural etc, have thrived

in pockets where traditional banks face limited geographical

reach, lower appetite and ability of mainstream banks to reach

such borrowers.

According to Sidbi, share of NBFCs in MSME financing

has risen to 11.3 percent as of mid-2018 against 8.4 percent

two years prior, leading to lower market share of public

sector banks to 51 percent in June 2018 against 60 percent two

years ago.

"Even if troubled NBFCs rolled back their presence, it

will be an uphill task for banks to fill this gap," says Rao.



(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)