Chart of the Day: NBFCs are yet to fix their stressed loan book

Investors in capital markets perceive non-bank finance companies to be riskier bets than banks with good reason. NBFCs haven’t been able to bounce back from the economic slowdown that began well before the pandemic hit.

The build-up of stress on their books has continued to remain elevated. Gross bad loans as a percentage of total book has remained above 6 percent for four consecutive years. On the contrary, banks saw bad loans surge but then also reduce quickly after the pandemic receded. As the above chart shows, non-performing loans of banks has fallen sharply in the past three years as the corporate loan book healed.

To be sure, a large part of this reduction has been through write-offs. That said, NBFCs too have written off large chunks of bad loans in the past. This hasn’t helped in bringing down the delinquencies in their books.

Tightened regulations on asset classification and provisioning requirements and the adoption of expected credit loss method for assessing stress may help non-banks to avoid a pile-up of dud loans in the coming quarters. The trend of being riskier than banks may perhaps change for the good.