IL&FS-led NBFC crisis may help banks regain corporate credit share: Report

NBFCs thrived on ample support from global funds and lighter regulations, but they are likely to face greater scrutiny now

The deepening crisis in the non-baking finance companies space may help commercial banks re-emerge as a primary source of lending for companies, as the former fight for survival under more regulatory glare, says a report.  

The "genesis" of the crisis at non-banking finance companies (NBFCs) like infra lender IL&FS is the rapid pace of rise in their share in financial intermediation since 2014, when commercial banks began battling NPAs, notes Singaporean brokerage DBS in a report.

"In FY19, we see a likelihood that the share of domestic banks will re-emerge as a primary source of funding to the commercial sector, over bond markets and non-bank entities," it says.

Banks will achieve this despite as many as 11 state-run lenders are under the prompt corrective action initiated by the Reserve Bank which comes with curbs in lending, it says.
 

This will be possible because of rising markets-based borrowing costs, tighter liquidity conditions and the efforts undertaken to resolve asset quality issues, as per the report.

In FY17, the share of bank funding to the commercial sector dropped to 34 per cent from 55 in the previous year and has come back to 50 per cent in FY18, it said.

The non-banking finance companies thrived on ample support from global funds and lighter regulations, but they are likely to face greater scrutiny now. They rely heavily on the wholesale markets for their borrowings which have seen a rise in yields, the report stated. 
 

The note also says the excess borrowing over the past few years has also increased their leverage ratios which will limit the extent of support they can give to the commercial sector.

For commercial banks, the note says NPAs are likely to peak by March helped by the introduction of bankruptcy laws and write-offs, but resolution of the dud assets will take a longer time.