Growth gathers steam for NBFCs in H1FY21 as balance sheets expand 12%: RBI

In view of the pandemic, and also in order to maintain adequate liquidity, NBFCs increased their cash and bank balances significantly during the year, RBI report said

The growth momentum seems to be back for finance companies. Their balance sheets expanded at 12.1 per cent (year-on-year basis) till September 2020 (H1FY21), up from 8.9 per cent for 2019-20 (FY20). In 2018-19, it had clocked 20.6 per cent growth.

The year 2019-20 marked a significant moderation in NBFCs’ financial performance, after double-digit balance sheet growth in the previous three years, according to a report on Trends and Progress in Banking in India. The Reserve Bank of India publishes this report annually.  

A challenging macroeconomic environment, weak demand compounded by risk aversion, liquidity stress and rising borrowing costs in the wake of the IL&FS default resulted in a substantial deceleration in asset growth in 2019-20. The impact was particularly pronounced for non-deposit taking systematically important finance firms. On the other hand, deposit taking NBFCs weathered this difficult period and continued to grow at a healthy pace.

 

In view of the pandemic, and also in order  as well as to maintain adequate liquidity, NBFCs increased their cash and bank balances significantly during the year, the RBI report said.

The NBFC sector's asset quality deteriorated as slippages rose in 2019-20. However, efforts were made by these companies to clean up their balance sheets, as reflected in their written-off and recovery ratios.

The Net Non-Performing Asset (Net NPAs) ratio remained stable and the provision coverage ratio (PCR) improved in the period under consideration. In 2020-21 (up to September), impairment in asset quality intensified. The bad loans in per cent term moved up from around six per cent in March 19 to 6.5 per cent in March 2020 and further inched up to 6.7 per cent by end of September 2020.
 

RBI harps on perverse incentive structure in private banks
 
The RBI’s Trend and Progress Report touched upon compensation practices in banks, stating “perverse incentive structures that reward risk-takers for short-term profits, without adequate recognition of long term risks, jeopardise various stakeholders’ interests and have potential to threaten financial stability”.  The RBI said banks which compete in the same market place have different compensation levels and struc­tures. The median variable pay of CEOs in private banks and small finance banks was much less than 50 per cent of their total compensation. Deferrals in paym­ent of variable pay were found to be infrequent.