Credit growth may slip to 10% on band-aids in future, warn analysts

Analysts have warned that measures taken by the Reserve Bank of India (RBI) and State Bank of India (SBI) to improve liquidity in the financial system — possibly facing the worst crisis in the past five years — are only temporary ones. More was required to restore normalcy to credit markets, they added.

Over the past month, the central bank has infused Rs 320 billion into the system and is expected to pump in Rs 240 billion more in October, through open-market operations. On the other hand, the government is encouraging banks to purchase asset buyouts from non-banking financial companies (NBFCs) to help tide over the present challenges.

SBI announced they would purchase assets worth Rs 450 billion from NBFCs through 2018-19, which will create an additional source of liquidity for these organisations. Banks have also been allowed to use another 2 per cent of statutory liquidity ratio (SLR) securities held by them.

“These moves will help stabilise the systemic liquidity, especially during a possible drain in the festive season. Some well-capitalised banks, many of which are approaching their sectoral cap on NBFCs, may also expand their asset buyout as an alternative to expand funding to NBFCs,” said Soumyajit Niyogi, associate director, India Ratings and Research, in a recent report.

Participants at a webinar, organised by Standard and Poor’s (S&P) on Thursday morning, said they expected liquidity conditions to improve in a month or three. Banks have not withdrawn credit lines and have actually rolled over short-term debt.

Umesh Revankar, managing director and chief executive officer, Shriram Transport Finance, said, “Companies need to look at long-term funding, which will definitely impact loan growth. But, this is not negative; it just means NBFCs will grow slower this year.”

“We have been securitising loans for priority-sector lending. So our rates are lower than the MCLR (marginal cost of funds lending rate). But, it might change now,” he said, adding: “Loan rates have gone up by 100bps. It can go higher.”

Securitising — selling loans to banks — seems to have emerged as a primary solution.

For NBFCs, this reduces the cost of servicing loans. Banks get good-quality loans. India Ratings said the 15 top NBFCs have around Rs 5 trillion loan assets that are “preferred for assignment or securitisation”.

“In the current environment, banks could cherry pick assets from NBFCs and price them well instead of originating them, thus avoiding early delinquencies. NBFCs will see some relief on the perception of inadequate liquidity and the securitisation push would be conducive for matching assets with liabilities. This is also an opportunity for NBFCs to reduce dependence on short-term funding, as they take some assets off the balance sheet,” Nyogi said.

It is necessary to strengthen and develop an “active securitisation market” to ensure a sustainable funding option along, he added.

Securitisation is, however, only a temporary solution, said analysts, adding that interests in NBFC-related asset-backed securities was waning.

In a note, rating agency Fitch said recent loan-repayment defaults by the Infrastructure Leasing and Finance Services’ subsidiaries had increased the risk of a counter-party failure in asset-backed security transactions.

The larger issue, a Credit Suisse report said, was the slowdown in NBFC growth could lead to an economy-wide credit crunch, as overall credit growth could fall below 10 per cent.

The situation could be aggravated as top public banks have capital constraints and are bogged down with bad-debt resolution, while private banks deal with governance and liquidity issues.

Bank credit growth has averaged 7 per cent over the past two years. Lending to NBFCs has accelerated to Rs 5.9 trillion, growing at 43 per cent, year-on-year, as of August 2018.

Hemant Jhajhria, partner, financial services, PwC, speaking at Assocham’s conference on NBFCs in Mumbai said, “The sector will tide over the liquidity concerns in the next few months. The important thing is that as companies get scale, there will be a higher cost of compliance. When finance companies expand and grow there will be difficult governance challenges. Like any industry, NBFCs will need to alter their business models.”

SEARCH FOR LIQUIDITY

• RBI has pumped Rs 320 billion of liquidity. Another Rs 240 bn to be pumped in October
• SBI will purchase Rs 450 billion of NBFC loan assets during FY19
• Credit Suisse says slowdown in NBFC growth to lead to an economy-wide credit crunch
• Bank credit growth at 12 per cent in August 2018, could fall below 10% by end-FY19
• Top 15 NBFCs have Rs 5 trillion of loan assets ready for securitisation
• Bank lending to NBFCs has accelerated to Rs 5.9 trillion as of August 2018
• Fitch says IL&FS defaults led to slowing activity and trades in Indian securitisation market