Stress in NBFC sector shows no sign of abating

NEW DELHI:  Non-banking financial companies (NBFCs) in the country will continue to face stress from their exposure to vulnerable sectors and both the Finance Ministry and Reserve Bank of India (RBI) are closely monitoring the sector for possible weaknesses. According to officials, the RBI is monitoring the top 50 NBFCs, which it considers systemically important for the economy.  

Several rating agencies including Moody’s and Fitch have also highlighted the problems of the NBFC sector. Fitch in a report released on Wednesday warned that NBFCs with “construction funding and SME exposure, which will take longer to recover from the (current Covid-induced) crisis, will face greater risks.” 

“We know their stress levels from loans to  certain sectors remain heightened, though NBFCs which were into gold loans or retail consumer loans have done better … there is need for caution as we do not wish to see any major delinquencies which undermines public confidence in the sector,” said officials.

Sanjay Bhattacharyya, former Managing Director of SBI, said, “One way to help out the sector is to extend the credit guarantee that the government has given to the banking sector for loans to MSMEs and the NBFC sector. NBFCs play a very important role in lending to small businesses, who are unable to access normal banking and the sector’s health is important to the overall financial ecosystem.”

In November, the RBI ordered a special audit of Srei Infrastructure Finance Ltd and its subsidiary Srei Equipment Finance Ltd raising  concerns in the market.  Earlier, India has faced delinquencies by several large NBFCs, including IL&FS and DHFL.

“These sectors are likely to experience greater problem-loan formation in 2021, as borrower relief programmes taper off,” Fitch noted. Gross NPAs in the sector increased from 6.1 per cent in March 2019 to 6.4 per cent in March 2020. Officials also pointed out that nearly 10,000 NBFCs are registered with the banking regulator. Of these, only 66 are deposit accepting and some 278 of these NBFCs are considered systemically important.