NBFC crisis will hit loan growth badly

Loan growth could slow to less than 10% as mutual funds (MFs) find it harder to finance non-banking financial companies (NBFCs) and housing finance companies (HFCs). Over the past couple of years, NBFCs have played a big role in driving loans and have accounted for a fourth or, at times, even a third of the incremental credit. This was possible because they have sourced anywhere between 25% and 40% of their borrowings from MFs, analysts at Credit Suisse point out.

However, the large redemptions from liquid funds in September suggest NBFCs will no longer find it easy to access money from MFs. Unless they are able to source borrowings from elsewhere NBFCs will be constrained for funds and that could slow their disbursements and consequently, loan growth for the system.

The record outflows from liquid mutual fund schemes at a whopping Rs 2.1 lakh crore in September, the highest in at least three years, have highlighted how over-dependent HFCs and NBFCs have been on MFs these past few years. Several MFs are almost full-up on their quotas for NBFCs and HFCs. If MFs are not to breach their prudential exposure limits, they must attract large inflows into liquid and debt funds.

While banks led by State Bank of India (SBI) have stepped in to support NBFCs —bank lending to NBFCs already constitutes 20% of incremental lending.

Also, banks’ current lending of close to Rs 6 lakh crore to NBFCs attracts a risk weight for purposes of capital allocation of only 35%. Once they buy the loans, these would need to be supported with twice the amount of capital so they would opt mainly for home loans that don’t require too much capital to be set aside and might stay away from loans to SMEs.

Also, most state-owned lenders don’t have too much capital to spare and about a dozen of them are virtually out of action thanks to restrictions put on them by the Reserve Bank of India (RBI).

While private sector banks have adequate capital with deposits growing at a somewhat slow pace of around 8%, their loan deposit ratios are already fairly high. Given how interest rates are going up, NBFCs will need to pay more borrowing in the corporate bond market and this will make them less competitive in the loan market vis a vis banks. With investors looking for better yields, activity in the corporate bond market has slowed significantly. Between April and September about Rs 2.01 lakh crore was mopped up in the corporate bond markets. This is lower by about 38% compared with the amounts raised in the corresponding period of 2017 and the lowest in four years.