Liquidity crunch continues to hurt NBFCs, GDP growth – Fitch

Operating conditions for Indian non-banking financial companies/institutions (NBFCs or NBFIs) have improved slightly in the first two months of 2020, however, uncertainty levels continue to be high for certain segments within the sector such as housing finance and wholesale lending, global ratings agency Fitch said in a note today.

“The recent fundraising by a number of NBFIs during the first two months of 2020 points to a slightly improved funding environment. Fitch expects NBFIs to continue to tap the offshore market, but access is likely to remain uneven and limited largely to retail-focused NBFIs and those backed by large corporate groups.

“Wholesale and housing finance companies are the most at risk as they will continue to find it difficult to raise funds – given their greater exposure to the real-estate sector where we expect further pressure on cash flows and collateral values.”

NBFCs play a crucial role in the Indian economy due to a failure by the banks to address the needs of the majority of the people and small businesses.

Due to high levels of red-tape, getting a loan from a bank is nearly impossible for those without a predictable and demonstrable levels of income. The excluded segments typically include those who work in the informal sector as well as small businesses, which are considered too risky.

As such, various types of non-banking finance companies, including those specializing in small and medium enterprises, micro-finance companies, gold loan providers and housing loan providers, accounted for the majority of the loans provided in India.

They, in turn, used to get their funds from banks and debt mutual funds.

However, due to a crackdown on bad loans, nepotism and cronyism in the banking sector, fund flow from banks have dwindled over the last several months, affecting NBFCs’ ability to operate. The situation was complicated by revelations of corruption at IL&FS, one of India’s largest NBFIs, and defaults by Dewan Housing Finance Ltd.

Fitch today said the liquidity crunch continues to have an economy-wide impact.

“Fitch expects India’s real GDP growth to slow to 4.6% in the financial year ending 31 March 2020 (FY20) from 6.8% in FY19, led by a squeeze in credit availability from non-bank financial institutions (NBFI) and deterioration in business and consumer confidence, with a modest rebound to 5.6% for FY21. Funding conditions are therefore likely to remain weak and Indian FIs risk-averse in the year ahead – in line with Fitch’s negative sector outlook for both banks and NBFIs.”

It warned that concerns around asset-quality are likely to intensify even more if the stress on non-banks, real estate and SMEs remain unresolved.

“The support measures from the authorities have had a mixed effect, with the onus largely on banks’ weak balance sheets through higher lending and regulatory forbearance.”