Alarm raised over lack of funding for NBFCs

Report on Trend and Progress of Banking in India 2008-09.

Pointing to the liquidity problems that non-banking financial companies (NBFCs) faced during last year’s financial crisis, the Reserve Bank of India (RBI) said NBFCs lacked access to low-cost funding, leading them to resort to unsecured loans to build their asset base.

“There is a need to develop alternative funding sources like an active corporate bond market. Alternative funding sources will facilitate asset growth as well as asset diversification,” said RBI.

The October-December 2008 quarter was particularly tough for NBFCs as funding sources dried up and they had trouble in rolling over their debt. As a result, rollover of commercial papers became a problem, resulting in redemption pressures, as most of the assets were long term and quick unwinding was not possible.

Though only a few large NBFCs faced liquidity issues, the general lack of confidence hit the sector as a whole, leading to banks’ refusal to lend or roll over the sanctioned lines of credit. To help NBFCs tide over the liquidity problems, RBI took a host of measures such as permitting systemically important non-deposit taking NBFCs to go for short-term foreign currency borrowings under the approval route, allowing them to issue perpetual debt instruments and reducing banks’ risk weight for loans to NBFCs.

Despite the deterioration in the credit environment, the asset quality of systemically important non-deposit-taking NBFCs remained stable in 2008-09. The gross NPAs (non-performing assets) to total assets ratio of such NBFCs remained unchanged at 2.3 per cent for 2008-09 but recorded a marginal rise for the quarter ended June 2009. The net NPAs to total assets ratio declined from 1.6 per cent at the end of March 2008 to 0.7 per cent at the end of March 2009, but increased to 0.9 per cent during the quarter ended June 2009.

Total assets of NBFCs, excluding residuary non-banking companies, grew 1.3 per cent in 2008-09 as compared with 53.6 per cent during 2007-08. Borrowings, a major source of funds for NBFCs, rose 9.3 per cent during the year, while public deposits fell 4.9 per cent, indicating the continuing shift in the pattern of resources raised.

Borrowings by NBFCs from banks and financial institutions rose sharply by 29.3 per cent while borrowings by way of bonds and debentures remained flat during 2008-09.