Debt of NBFCs fast catching up with non-finance companies: Details here

Borrowings by NBFCs up 21% CAGR in last 5 years

The rise in debt of non-bank lenders has outpaced that of traditional corporates in manufacturing and infrastructure sectors, and took up a much larger proportion of India Inc’s total borrowings. The listed non-banking financial companies (NBFCs), such as Housing Development Finance Corporation (HDFC), Bajaj Finance, Indiabulls Housing Finance, Shriram Transport Finance, Power Finance Corp and L&T Finance together accounted for 45.4 per cent of all corporate borrowings (excluding banks) up from 29.3 per cent in FY14 and 23.7 per cent in FY09. 

In the past five years, top-listed NBFCs made fresh borrowings of Rs 15.8 trillion against Rs 7.1 trillion worth of fresh borrowings by traditional corporates. The combined borrowings by NBFCs grew at a compounded annual growth rate (CAGR) of 21 per cent since FY14 against 5.4 per cent CAGR growth in borrowings reported by manufacturing and infrastructure sectors during the period. 

At the end of March this year, listed NBFCs had a total outstanding debt of Rs 25.7 trillion, up from Rs 9.9 trillion at the end of March 2014. In the same period, total outstanding debt by non-financial corporates grew from around Rs 24 trillion to nearly Rs 31 trillion now (see chart). 

The analysis is based on the audited financials of a common sample of 848 companies, which are either part of BSE 500 index, BSE MidCap index or BSE SmallCap index. It includes 39 NBFCs, excluding non-lenders such as insurance companies, brokerages, investment and holding companies. 

Analysts attribute this to stagnation in fresh investment by corporate sector and a boom in retail credit driven by non-bank lenders. “Fresh capex by traditional companies has been stagnant translating into little or no incremental borrowings by manufacturing and infrastructure companies in the last few years. 

In contrast, retail lenders grew rapidly in the last few years driven by a boom in retail credit leading to a huge expansion in balance sheet of NBFCs,” says G Chokkalingam, founder & MD, Equinomics Research & Advisory Services. 

The dichotomy is evident in the assets too. The combined assets of non-financial companies expanded at a compounded annual growth rate (CAGR) of 6.8 per cent in the last five years, while those of NBFCs went up at a CAGR of 19.8 per cent. 

Five years ago, there were just four NBFCs with assets under management of Rs 50,000 crore or more, now there are 17 such non-bank lenders. These big non-bank lenders together had assets worth Rs 7 trillion at the end of March 2014, which swelled to Rs 27.3 trillion in FY19. The sector’s total assets under management is up from Rs 12.5 trillion at the end of March 2014 to Rs 30.8 trillion at the end of March this year. 

For comparison, there are 31 commercial banks in listed space with assets worth Rs 50,000 crore, marginally up from 28 at the end of FY14. It includes two new banks during the period — IDFC First Bank and Bandhan Bank. 

Analysts also say the growing asset base of the NBFC sector poses a challenge for the banking system. “NBFCs are now a key source of systematic risk to the banking sector and this explains why the central banks and the Union government have announced a slew of measures to enhance liquidity flow to the sector to avert defaults in the sector,” says Dhananjay Sinha, head strategist and chief economist, IDFC Securities.

The NBFC industry, however, shows signs of over-reach with a steady decline in key metrics such as return on asset and rise in leverage ratio. The industry’s combined net profit has doubled in the last five-years against 2.6x jump in their gross borrowings during the period.

The average return on assets (RoA) in the sector declined to around 2 per cent during year ending March 2019 against 2.4 per cent in FY14 and a high of 4.4 per cent in FY10. Analysts find this to be on the lower side. “RoA should be at least three per cent or higher to keep the industry finances on a sustainable footing. Lower ratios raise the risk for their creditors and bond holders,” says Sinha.  

Experts say that a moderation in RoA also forces companies load up on more debt to push up their earnings growth and achieve higher levels of return on equity (RoE). The industry average debt to equity ratio increased to all-time high of 6.1x at the end of March 2019 against 5.9x a year ago, 5.1x at the end of March 2014 and 4.6x at the end of March 2009. In the same period, the industry's average return on equity increased from 13.2 per cent in FY09 to 14.5 per cent in FY19 and 16.7 per cent in FY14.

Excluding HDFC and Bajaj Finance, two of the industry's most profitable lenders, the industry's average debt to equity ratio is much higher at 7.2x at the end of March this year up from 5.2x at the end of March 2014.