Credit disbursals by non-banking finance companies (NBFCs) have plunged by a third in the year to March after they were gripped by the liquidity squeeze that followed the unexpected default by Infrastructure Leasing & Financial Services (IL&FS) in September last year. Given that NBFCs contribute almost 20 per cent of the total credit in India, the numbers reflect the challenge this poses to the government’s plan to revive the economy.
NBFC credit dropped 31 per cent to Rs 1.96 lakh crore at the end of March from Rs 2.83 lakh crore in the year earlier, according to data compiled by credit bureau CRIF Highmark and industry body Finance Industry Development Council (FIDC). Automobile, agriculture, MSMEs (micro, small and medium enterprises) and property-related loans registered a drop of 50-80 per cent. “The slowdown is real,” said the CEO of a troubled NBFC. “The government and the regulators have to take note of this and act fast, otherwise we are headed towards a huge consumption collapse and eventually an economic recession.”
Worst hit were cash credit facilities to small businesses, key to the growth recovery plan as generators of employment, which plummeted 88 per cent. Auto loans dropped 69 per cent, while secured business loan disbursals fell 62 per cent. Farm credit dropped 55 per cent, education loan sanctions dropped 43 per cent and housing loans slumped 23 per cent. Apart from IL&FS, repayment concerns about Dewan Housing Finance Corp Ltd (DHFL) and the Essel Group have pushed funding costs at NBFCs to multi-year highs. Spreads on top-rated fiveyear bonds of Indian NBFCs have risen 70 basis points, or 0.7 percentage points, in the past year. A basis point is 0.01 percentage point.
The NBFC sector, save for a handful of well-managed companies, has been under pressure since the IL&FS default. Mutual funds, a key lender to them after being flooded with cash from investors, have frozen funds because of redemption pressures. Cash-strapped NBFCs, a key intermediary that lent to millions of small firms and individuals to buy cars and motorcycles, are unable to meet demand. That’s partly to blame for the collapse in automobile sales and cuts in discretionary spending. Sales of cars and utility vehicles fell the most in nearly 18 years in May, according to Society of Indian Automobile Manufacturers (SIAM) data. Banks have been reluctant to lend to NBFCs since the IL&FS default, forcing some of them look overseas for borrowings.
The regulator doesn’t regard the situation as dire. In the monetary policy announced on June 6, RBI governor Shaktikanta Das had dashed expectations of a special liquidity window for the struggling sector. The RBI said it was “watching” the situation and would act, if required.
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“The RBI will ensure that adequate liquidity is available in the system for all productive purposes,” Das said. “We are closely monitoring the developments in the NBFC and housing finance companies, and will ensure financial stability is maintained. We will not hesitate to take any measure to ensure financial stability.”
ET reported on June 24 that NBFCs had written to the governor Das warning about the damaging effects of implementing the proposed liquidity coverage ratio (LCR) norms without taking measures to ease the liquidity crisis. The central bank had recently proposed a set of strict norms for NBFCs, including mandatory investments in government bonds and maintenance of cash thresholds, to enable them to tide over liquidity problems without causing disruptions to the broader financial system.
