Post-2015 slump to blame for NBFC crisis, banks' low credit growth: Experts

Outstanding credit growth declined to 13.2% between FY15 and FY18 from 18.2% between FY08 and FY15

Ten years after the collapse of Lehman Brothers and the onslaught of a global economic recession, India’s financial institutions are facing their own “self-induced” crisis. Owing to various factors, bank credit growth has slumped since 2015, as a result of which non-banking financial companies (NBFCs) began to rely heavily on debt issuance for loan-book as well as physical growth, said analysts. 

Between FY08 and FY15, overall bank credit grew at a CAGR of 18.2 per cent, but since then, outstanding credit growth has declined to 13.2 per cent between FY15 and FY18. 

Overall credit has grown manifold from about Rs 22 trillion as of March 2008 to Rs 77 trillion in August 2018. 

Historically, multiple bad credit decisions and poor monitoring of loans, given to large corporate over the years, by bankers led to the “non-performing assets” (NPAs) crisis. This has caused an “overhang” in the banking sector, slowing down credit growth in the post-2015 period, a report by CARE ratings noted. 

In 2015, the Reserve Bank of India (RBI) began its “clean-up” of the banking sector, with its Asset Quality Review (AQR) and subsequently brought in various NPA recognition and resolution schemes. 

This led to an increased cost of compliance, which made it harder for bankers to disburse large-term loans for financing infrastructure or large industrial ventures, said analysts. As a result, there has been a crunch in corporate lending 2015-16 onwards, noted analysts. 

Table 1 shows the annual change in the share of credit for the major sectors. 

Source: PRIME Database

Share of credit to the agriculture sector has gone up marginally from 12.5 per cent in FY08 (Rs 2.75 trillion) to 13.4 as of August 2018 (Rs 10 trillion). The share of credit to industry increased drastically from 38.9 per cent in FY08 (Rs 8.5 trillion) to 44.3 per cent in FY15 (Rs 26.5 trillion). As of August 2018, the share of credit to industry fell to below the levels of 2008, at 34.3 per cent (Rs 26.6 trillion). 

The retail credit segment takes up a sizeable share of the outstanding bank credit, having grown from 23.7 per cent in FY08 (Rs 5.2 trillion) to 25.6 per cent as of August 2018 (Rs 19.9 trillion). While the share of credit to services has increased from 24.9 per cent in FY08 (Rs 5.5 trillion) to 26.7 per cent as of August 2018 (Rs 20.8 trillion). 

“Incremental growth (in credit) during the current year can be attributed to the increase in the share of bank credit disbursed to services and personal loans, whereas the share of bank credit to the industry has moderated,” said Madan Sabnavis, chief economic at CARE Ratings. 

“Quite clearly there has been some tendency for banks to move away from high risk lending, which also tends to get concentrated in the SME sector to sectors such as services and retail where the propensity to turn into delinquent assets is lower,” he said. 

Source: RBI

NBFCs initially borrowed mainly from banks, the quantum of which has substantially grown over the last five years.

The share of bank lending to NBFCs has grown from 3.6 per cent in FY08 (Rs 793 billion) to 6.3 per cent as of August 2018 (Rs 4.9 trillion). Similarly, the share of credit for housing loans has increased from 11.8 per cent in FY08 (Rs 2.6 trillion) to 13.4 per cent as of August 2018 (Rs 10.4 trillion). 

In an environment of tighter regulations on banks and a slowdown in corporate credit, these NBFCs and housing finance companies (HFCs) began issuing commercial papers (CP) and other debt instruments to raise funds for lending. 

By raising money from the short-term debt market, NBFCs/HFCs have been able to pass on these funds to customers, in the form of loans. 

The practice became rampant in the last three years, analysts said, as NBFCs pooled 25-30 per cent of their incremental funding from CPs in the last few years, a report by Nomura India stated. 

The number of CP issuances increased to Rs 6.2 trillion between April and September this year as compared to Rs 3.8 trillion for FY18. About two-thirds of these issuances are from financial institutions, according to India Ratings. 

Table 2 shows the total outstanding CPs and bonds issued by different financial institutions as of September 2018. 

India Ratings said the top 12 NBFCs have CPs worth about Rs 300 billion due for repayments in the three months ending December 2018. NBFCs were feeding into a situation of asset-liability management mismatches as a result of over-relying on the short-term debt market for funds as a result of slowing bank credit growth.