(Co-authored with Pramod Sinha and Radhika Pandey)
Banks and Non-bank financial companies (NBFCs) form an integral part of the financial sector. In recent times, banks have seen robust growth in demand for credit, improved asset quality, record profits, strong capital and comfortable liquidity buffers. The Gross Non Performing Assets (GNPA) ratio of scheduled commercial banks (SCBs) fell to a seven year low of 5 percent, while the net non-performing assets (NNPA) dropped to a 10-year low of 1.3 percent in September 2022.
The RBI’s Financial Stability Report of December 2022, suggested that banks are well-positioned to withstand even severe stress conditions. While displaying confidence in the performance of banks in the present challenging environment, RBI has sounded note of caution on NBFCs in its various reports. According to the Financial Stability Report, while the GNPA ratio of the NBFC sector fell from 6.9 per cent in June 2021 to 5.1 per cent in September 2022, stress is observed in some segments of the NBFC sector such as NBFC Investment and Credit Companies and NBFC-Factor. The recent regulatory refinements on NBFCs are also likely to impact the sector's assessment of asset quality in the near term.
In its report on “Trend and Progress on Banking in India”, the RBI mentioned that NBFCs need to be mindful of the rise in the borrowing costs following the monetary policy tightening. The RBI has raised the benchmark policy rate by 225 basis points. Banks have not passed on a substantial part of the rise in repo rate through a concomitant rise in the Marginal Cost of Funds based lending rate. So far, NBFCs have not felt the surge in borrowing costs but going forward the scenario may change. Cost of funds raised through bonds and Non-convertible debentures has also risen for NBFCs as per the analysis by India Ratings.
The caution raised by RBI requires continuous monitoring of the performance of NBFCs. In this backdrop, this note delves into the balance-sheet data and quarterly financial performance and presents an assessment of the performance of the NBFCs across categories.
NBFC Performance: A sectoral assessment
|
Industry / Indicator
|
Sep 2021
|
Dec 2021
|
Mar 2022
|
Jun 2022
|
Sep 2022
|
|
Auto finance services (10)
|
|
Borrowings
|
2,79,276
|
|
2,92,932
|
|
328720
(17.7)
|
|
Loans and advances
|
2,94,539
|
|
3,10,733
|
|
343564
(16.6)
|
|
Net interest income
|
6,412
|
6,706
|
6,943
|
7,089
|
7279
(13.5)
|
|
Net profit
|
2,747
|
2,445
|
2,660
|
2,178
|
2609
(-5.0)
|
|
Housing finance services (24)
|
|
Borrowings
|
9,11,416
|
|
9,68,738
|
|
10,06,931
(10.5)
|
|
Loans and advances
|
9,88,742
|
|
10,56,524
|
|
11,03,028
(11.6)
|
|
Net interest income
|
9,990
|
9,706
|
10,504
|
10,596
|
11,556
(15.7)
|
|
Net profit
|
5,431
|
5,413
|
6,255
|
6,052
|
6,454
(18.8)
|
|
Infrastructure finance services (5)
|
|
Borrowings
|
6,84,956
|
|
6,75,356
|
|
6,88,946
(0.6)
|
|
Loans and advances
|
7,52,604
|
|
7,46,160
|
|
7,57,007
(0.6)
|
|
Net interest income
|
8,587
|
8,404
|
7,967
|
6,593
|
7,963
(-7.3)
|
|
Net profit
|
5,138
|
4,628
|
4,897
|
5,032
|
5,944
(15.7)
|
|
Others asset financing services (11)
|
|
Borrowings
|
6,03,333
|
|
6,71,417
|
|
6,80,814 (12.8)
|
|
Loans and advances
|
3,11,735
|
|
3,46,592
|
|
3,54,473 (13.7)
|
|
Net interest income
|
10,065
|
10,791
|
10,734
|
11,209
|
11,611 (15.4)
|
|
Net profit
|
4,662
|
5,124
|
5,972
|
5,770
|
6,005 (28.3)
|
*Figures in Rs Crore; Author’s calculation; Figures in parenthesis represent YoY Change (%)
Source: CMIE Prowess
Auto finance service group comprises of 10 sample firms. These firms account for a major share of loans advanced by the auto finance segment in 2021-22. The net interest income of the sample firms registered a growth of 13.5% growth in September 2022 over September 2021 quarter. On the other hand, the net profits of the sampled firms saw a contraction of 5% on account of higher provisions and contingencies in the September 2022 quarter.
Net profit growth though negative has seen a significant improvement over the preceding quarter. Borrowings by these set of firms grew at 17.7% in September 2022 over September 2021. This is higher than the growth seen in loans and advances (16.6%). While, there is no immediate concern, given that the leverage ratio (Outside liabilities / Owned funds) has seen a secular decline from 6.5 times in September 2018 to 4.1 in September 2021, the recent uptick in the leverage ratio in the past one year (4.3 times in March 2022 and 4.5 times in September 2022) points towards build-up of higher liabilities.
Housing finance service group with 24 firms (these firms account for 93% of the loans and advances made by this sector during 2021-22) witnessed a stellar performance during the September 22 quarter with net profit growing by nearly 18.8% over the September 2021 quarter. Profits were driven by a robust 15.7% growth in the net interest income. In contrast to the auto finance services firms, growth in loans and advances for this sector outpaced the growth in borrowings during the September 2022 quarter over Sep 2021 (11.6% and 10.5% respectively). This is a healthy sign and the housing finance sector is expected to build further on the improved performance of the real estate sector.
Infrastructure finance service with 5 firms in the sample (These five firms account for 93% of the total Loans & advances by this sector in 2021- 22) witnessed a muted performance in the September 2022 quarter. Both loans & advances and borrowings by this sector witnessed a contraction in the September 2022 quarter over September 2021 quarter. Further, the net interest income witnessed a contraction of nearly 7%. However with Provisions & contingencies down by nearly 77%, the net profits clocked a decent growth of 15% in the September 2022 quarter.
Other asset financing service comprising of 11 firms witnessed a healthy performance. Net interest income grew by a robust 15% during the September 2022 quarter over September 2021. While, the net profit soared by over 28% in the September 2022 quarter over September 2021, loans & advances grew by a healthy 13.7% during the said period.
The sectoral analysis suggests that while the housing finance segment is doing well, the infrastructure finance segment’s performance is a cause of concern. The recent uptick in the leverage ratio amongst the auto-finance segment firms may pose a source of risk in the coming quarters.
Interconnectedness and systemic risk concerns
Regular monitoring of NBFCs is also needed as their reliance on bank borrowing has increased post 2018. Bank credit to NBFCs registered a robust growth of 30.6 percent in the quarter ending September 2022. The share of NBFCs in outstanding bank credit gradually increased from 8.2 percent in September 2021 to 9.3 percent in September 2022.
The growing interconnectedness within the financial sector and reliance on bank borrowing by NBFCs may lead to systemic risk concerns. In recent months, the RBI has sought to address the potential systemic risk by strengthening the regulation of NBFCs. Multiple regulatory changes such as Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances (IRACP); Scale-based regulation (SBR); and Prompt Corrective Action have been introduced to bring parity with banks and strengthen the NBFC sector.
Rachna Sharma and Pramod Sinha are Fellow II, and Radhika Pandey is Senior Fellow, NIPFP.
The views expressed in the post are those of the authors only. No responsibility for them should be attributed to NIPFP.
