Loan Repayment Defaults Telling On Nbfcs Bottomlines

Non-banking finance companies (NBFCs) are facing a new threat in the form of increasing defaults from their retail customers. Besides, the steady decline in the consumer goods sales has further aggravated the scope for consumer financing, putting additional pressure on their bottom lines.

Most NBFCs are now focusing on recovery of loans given by them to maintain a minimum level of cash flow. Cash flows have been severely curtailed since the breakout of the CRB scam which has brought about a slowdown in the rate of growth in new deposits and redemption pressures on old deposits.

But, there has been strong signs of an emerging trend of defaults which has not been much in evidence in the retail finance sector. A section of borrowers are saying that they can afford to default on payments. NBFCs cannot expect much support from the government and the judiciary to enforce recovery, a senior executive in an NBFC said.

 

Recent court judgements against repossession of cars by NBFCs have also added to this growing signs of audacity among certain borrowers, sources said. Besides, the value of repossessed, second-hand cars is so low that NBFCs are not very keen on seizing vehicles from borrowers who default on payments.

For most NBFCs operating in Delhi, there has been a net outgo of funds in the past four weeks because of the slow growth in deposits on the one hand and the pressures of investors withdrawing their deposits on the other. A large sector of customers are not renewing the deposits which have reached maturity stage.

The sources in NBFCs said there has been a 40-50 per cent reduction in the rate of growth in new deposits in Delhi since the CRB scam broke out. The sharp rise in the deposits of banks is also a pointer to the low increase in deposits of finance companies.

A large section of NBFCs have either stopped accepting fresh deposits or are discouraging them in order to avoid asset-liability mismatch. Those still accepting deposits are doing so in order to build up the necessary cash flows to meet the redemption pressures on old deposits. NBFCs usually deploy funds in investments, corporate lending and retail finance to support the purchases of trucks, cars and other consumer durables.

Till recently, NBFCs regarded retail lending as a safe bet compared to the other forms of portfolios. The rate of default in the auto and other consumer finance portfolios have been significantly lower compared to lending to corporates. Retail financing has emerged as a major attraction after a series of defaults cropped up in the inter-corporate deposit market and several NBFCs burnt their fingers in equity investments due to the sharp decline in the prices of shares.

Most of the major NBFCs have been claiming a recovery rate of 98 per cent and above in their car and auto finance portfolios. But, there are now strong signs of a sharp increase in the rate of defaults in these and other consumer finance portfolios.