Credit growth expected to stay slow despite RBI's interest rate cut: Fitch

DHFL's debacle shows grave funding challenge to NBFCs

Global rating agency Dewan Housing Corporation's liquidity problems and its failure this week to pay coupons highlight the funding challenges faced by India's non-bank finance sector.

The liquidity pressures faced by finance firms are in stark contrast to situation in Indian banking sector. The latter has not faced significant liquidity pressure or deposit withdrawals, despite asset-quality and capital weaknesses.

The credit growth in India is expected to remain slow, despite this week's interest-rate cut, as most banks are capital-constrained and NBFIs face tighter funding conditions, Fitch said in a statement.

Non-bank financial institutions' (NBFI) issues were already known to the market but Dewan became a focus point after the failure of Infrastructure Leasing & Financial Services Limited in September 2018. IL&FS crisis contributed to a sector-wide liquidity squeeze as investors become more risk averse.

Indian NBFIs' liquidity is sensitive to market sentiment as their business models rely on short-term wholesale funding, which can dry up fast if market sentiment turns negative, Fitch said.

Funding models of housing finance companies and NBFCs loan, which have become increasingly reliant on short-term funding to fund longer-term assets, have been hit by the liquidity squeeze, it added.

The sector pressures have led India's top NBFIs to explore other sources of funding and to start positioning themselves to tap the US dollar bond market. 

"We expect Indian NBFIs to become more regular issuers in the offshore bond market as they seek to diversify their funding sources. If prudently managed, this should be credit positive as funding profiles are strengthened", it added.

The funding squeeze has contributed to higher funding costs and a slowdown in loan growth for India's NBFI sector.