The latest issue of financial stability report (FSR) by the Reserve Bank of India (RBI) says asset quality of non-banking financial companies (NBFCs) is expected to deteriorate further due to business disruptions caused by the Covid-19 pandemic, especially in the industry sector, one of the major recipients of NBFC credit.
The sector is recovering from the shocks of failure of a few large entities. While credit extended by them has fallen substantially, the sector has seen an increase in bad loans ratio, too.
A system-level stress test for the sector credit risk with a sample of 200 NBFCs, having an asset size of more than Rs 1,000 crore as of March 2020, reveals that under a high risk scenario the gross non-performing assets (NPAs) of NBFCs may increase from 6.8 per cent to 8.4 per cent, while in a medium risk scenario, it increases to 6.9 per cent. As of March 2020, NBFCs recorded gross NPAs of 6.3 per cent, up 100 basis points from March 2019. Also, during 2019-20, credit extended by NBFCs grew by 4.4 per cent against 22 per cent in 2018- 19.
It is important to note that, as of August 31, 2020, the NBFCs had 44.94 per cent of their book under moratorium which is 26.58 per cent of their total customers. A close look at the moratorium book of NBFCs revealed, as per data put out by RBI, more than 37 per cent of their corporate book, 67 per cent of the MSME book, and 56.51 per cent of their individual book was under moratorium. On a system level, a little over 40 per cent of the total book of all the lenders was under moratorium.
The RBI says stress tests at the individual NBFC level indicated that under the baseline, medium and high risk scenarios, CRAR of 3.3 per cent, 9.7 per cent, and 10.3 per cent of NBFCs would fall below the minimum regulatory requirements.
The FSR report of RBI further goes on to say that NBFCs and housing finance companies (HFCs) are the largest borrowers of funds from the financial system. And, a substantial part of funding comes from banks. Therefore, failure of any NBFC or HFC will act as a solvency shock to their lenders, which can further spread by contagion.
While NBFCs were the largest net borrowers of funds from the financial system, with gross payables of Rs 9.37 trillion and gross receivables of Rs 0.93 trillion at end-September 2020, HFCs were the second largest borrowers of funds from the financial system, with gross payables of around Rs 6.20 trillion gross receivables of Rs 0.53 trillion as at end-September 2020.
“In the non-banking space, the dominant positions occupied by mutual funds and insurance companies need to be assessed against the fact that NBFCs and housing finance firms remain the largest borrowers, with systemic implications. Meanwhile, shrinking of the inter-bank market has reduced the risk of bank failure due to contagion effects,” the RBI said in its report.