Government measures fail to stem slide in NBFC credit

MUMBAI: Credit disbursals by nonbanking financial companies (NBFCs) have continued to slide despite government measures to boost bank funding to the sector. Loan sanctions fell 34% in the September quarter, a year after the NBFC liquidity crisis that was sparked by the unexpected defaults at Infrastructure Leasing & Financial Services (IL&FS).

Total NBFC sanctions fell to Rs 1.9 lakh crore at the end of September from Rs 2.9 lakh crore during the same period last year, according to data compiled by the CRIF High Mark credit bureau and the Finance Industry Development Council (FIDC). The latter is a grouping of NBFCs.

“Liquidity transmission from PSBs (public sector banks) to non-AAA-rated NBFCs remains constricted. The cost of funds has gone up by over 120 bps (basis points) despite 135 bps of repo rate cut. Thus there is divergence of spread of almost 250 bps,” said Magma Housing Finance CEO Manish Jaiswal.

“NBFCs play a pivotal role driving last-mile credit reach and the government must systemically examine fund flow and cost of funds to non-AAA-rated NBFCs to fix this issue.”

While overall sector trends were bleak, a few segments such as consumer durable loans, gold loans and personal loans were in positive territory. On an annual basis, consumer loans grew 7% to Rs 13,114 crore while personal loans grew 22% to Rs 18,262 crore. Gold loans rose 17%.

The government and the Reserve Bank of India (RBI) have announced several measures to arrest the collapse of the nonbank lending space that contributes over 20% to total credit. They didn’t, however, implement a bailout or liquidity window.

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The regulator has put in place measures to increase liquidity in the system, aiding bank lending to NBFCs. It also relaxed securitisation and priority sector norms to facilitate this. The government announced a partial credit guarantee (PCG) scheme to restore confidence in the sector but that’s remained a nonstarter.

“Whatever measures have been announced by the government have not been very effective,” said FIDC co-chairman Raman Agarwal. “The measures are routed through banks and banks have become risk averse. Portfolio buyout is a band-aid solution and not a real solution to come out of the liquidity squeeze.”

The NBFC sector is facing multiyear-high credit costs with banks showing little enthusiasm to lend to them. Data show that before the IL&FS crisis in September last year, banks charged nearly 40 bps as the spread on AAA-rated NBFC paper. This rose to more than 1.5 percentage point and has remained at that level despite the regulatory and policy measures.

“The government’s PCG scheme is yet to see any liquidity transmission and even the sanctions have not really been forthcoming,” said Jaiswal. “The PCG scheme has remained as a well-meaning intent on paper and is yet to reach the desired level of execution.”

Among the casualties of the credit crunch is mortgage lender Dewan Housing Finance Corp. Ltd (DHFL), which became the first NBFC to enter bankruptcy resolution under the Insolvency and Bankruptcy Code (IBC). DHFL owes the banking system nearly Rs 1 lakh crore. Another nonbank lender Altico Capital, which failed to make payments in September this year, has failed to raise capital or find any resolution. Mutual funds, a key lender to NBFCs after being flooded with cash from investors in 2016-17, have frozen lending due to redemption pressures.



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