Non-bank growth to fall to 6-8% in FY20; lowest in a decade: Crisil

Funding issues, rising borrowing costs, re-calibration and de-risking of loan portfolios and economic slowdown will weigh on AUM growth

Non-banking entities in the financial services space are set to grow at the slowest pace in over a decade as the rate of expansion is expected to fall to 6-8 per cent in FY20, from 15 per cent in FY19, said rating agency CRISIL.

Constraints such as funding issues, rising borrowing costs, re-calibration as well as de-risking of loan portfolios and economic slowdown will weigh on the growth in the assets under management (AUM) of non-banks in FY20.

“Non-banks with strong parentage that account for about 70% of the sectoral AUM have been less impacted on the funding front. They are likely to drive sectoral growth over the medium term,” said Gurpreet Chhatwal, Presidentm Crisil Ratings.

AUM growth is likely to recover, though at an estimated 8-10 per cent per annum between FY 20 and 22, Crisil said.

The scarcity in liquidity for NBFCs for over a year now seemed to stem from the fact that they were operating an asset-liability mismatch by engaging in short-term borrowing and long-term lending. However, this has transcended to concerns about the asset quality of shadow banks especially on the wholesale book of NBFCs.

According to Crisil, delinquencies in the retail portfolio of NBFCs will rise, albeit marginally, in home loans and vehicle finance due to the slowdown. These two segments make up over half the overall sectoral AUM.  

On the wholesale front, delinquencies in real estate and structured credit space will rise sharply. “The real estate sector is experiencing significant headwinds while the financial flexibility of many underlying operating companies in the structured debt space has been impacted due to the overall slowdown in their business,” Crisil lsaid.

Moreover, the fact that almost half the loans given to the real estate sector are under a 3-5 year moratorium is adding to the misery of wholesale NBFCs and non-banks with significant wholesale portfolio. As and when the moratorium lapses, slippages will increase.

Non-banks are now re-orienting their business models to tide over the turbulent times. Many are opting for funding-light models such as co-lending or originate-to-sell which will reduce pressure on their balance sheets.

Moreover, real estate funding is moving to alternative investment funds or AIF structure, which can attract long-term stable resources to suit the underlying customised repayment needs of borrowers. NBFCs may also move to a fee-based income model for managing the exposures instead of on-balance sheet lending.

Furthermore, with the NBFCs may also explore the option of converting into a small finance banks to “sustainably mobilise retail liabilities” because of the new on-tap licensing norms of the Reserve Bank of India recently.