NBFC stress poses contagion risks to growth, says Economic Survey

The Economic Survey for 2018-19 highlighted contagion risks posed by stress in non-banking financial companies (NBFCs). It has hurt consumption growth in the automobile sector affecting manufacturing, the Survey said.

It warned that if the impact of the stress in the NBFC sector spilled over this year, it might lead to lower credit offtake from NBFCs, which might impede consumption spending growth. The Survey charted the origin of the NBFC crisis to mutual funds' (MFs') risk aversion after the IL&FS crisis in September. 

"Immediately after the IL&FS crisis, NBFCs faced a severe liquidity crunch as MFs stopped refinancing the loans of NBFCs," the Survey said. It added MFs' deployment towards NBFCs stood at -12 per cent in April. 

Banks' attempts to provide liquidity after the IL&FS crisis were short-lived as the Survey pointed out that “resources from the banking side started contracting from November 2018”. 

“This squeeze in the flow of resources to NBFCs has affected the lending capability of the sector in recent quarters," the Survey read. Credit growth in NBFCs in March 2018 stood at 30 per cent on a year-on-year (YoY) basis. In March 2019, it was at 9 per cent (YoY).  The Survey showed how some key performance indicators of NBFCs had deteriorated in 2018-19. The return on assets for the NBFC sector was down at 1.4 per cent in December 2018, from 1.6 per cent in March 2018. The capital to risk asset ratio or capital adequacy slipped to 22.2 per cent, from 22.8 per cent in the same period.

Net non-performing assets of NBFCs were up at 3.6 per cent from 3.2 per cent. The return on equity for the sector slipped to 6.1 per cent from 7 per cent.

Last August, MFs put in Rs 1.3 trillion in short-term paper (of less than 90 days) that NBFCs had issued. By the end of 2018-19, it had dropped to Rs 95,708 crore, showed the data sourced from Sebi. This shows a fall of 27 per cent.