Loans given by non-bank finance companies (NBFCs) have dropped sharply in the past two months as they have been busy repaying their
short-term obligations to mutual funds (MFs). In a report released on Monday, credit rating firm Crisil has said the decline in disbursements was as high as 70% in one case, with the average at around 50% for NBFCs rated by it, pointing to the severity of the business shrinkage.
A Crisil analysis of 33 rated NBFCs accounting for almost 30% of the sector, indicated that most of these NBFCs, especially asset finance companies, have significantly slowed down disbursements due to a lack of funds.Average monthly disbursements during September and October are estimated to be half of the disbursements in August.
NBFCs’ share in the overall retail finance space has reduced over the past few years. This is largely because banks with cheaper access to funds are dominating this segment. They now account for more than two-thirds of retail finance disbursements, up from about 20% in 2002. This trend is not expected to reverse.
NBFCs’ balance sheets have a significant asset-liability mismatch; more than 50% of NBFCs’ borrowings have maturities
of less than one year, while most of the assets have tenures of about three years. Further, the dependence on MFs for short-term funding has been high: Crisil-rated NBFCs’ estimated borrowings from MFs have increased to more than 45 per cent of total borrowing as of September 30, 2008, from 30% as on March 31, 2006. Increasingly facing redemption pressures, Crisil has said that MFs are no longer lending to the NBFC sector, and are withdrawing their existing exposures as these mature.
The recent measures announced by the Reserve Bank of India (RBI), allowing NBFCs increased access to funding, is expected to ease their debt servicing pressures, but will not address the longer-term issue of business growth.
While the going has been difficult for the sector, CRISIL nevertheless sees NBFCs’ business and financial profiles generally stronger today than they were during the crisis of the late 1990s. In addition, many NBFCs have strong parentage, enhancing their credit strength. CRISIL believes that the NBFC business model will change over the long term, with a focus on product innovation, and a move towards the originate-and-sell model.