Economic Survey 2019: Stress in NBFC sector may continue to hurt consumption in FY20

The stress in India's non-banking finance (NBFC) sector has contributed to slowdown in consumption as lack of liquidity from mutual funds and banks impaired its lending capabilities to the economy. This may continue to impact growth in the current financial year as well.

The Economic Survey said that immediately after the IL&FS crisis, NBFCs faced severe liquidity crunch as mutual funds stopped refinancing the loans of NBFCs.

Data from the Survey showed that while the flow of credit from banks improved, deployment of funds by mutual funds to the NBFC sector turned negative and stood at around 12 percent in April 2019.

"However, the government moved in quickly and took immediate measures to ringfence the problem and limit contagion," it added.

The Survey said that this stress in NBFC sector was one of the factors that contributed to the slowdown by adversely impacting consumption finance.

"If the impact of stress in the NBFC sector spills over to this year as well, it may lead to lower credit offtake from NBFCs, which may dampen growth in consumption spending," the Survey added.

At the end of December 2018, the capital adequacy of NBFC sector worsened to 22.2 percent in December 2018 from 22.8 percent in March 2018. The gross non-performing assets (NPA) ratio also deteriorated to 6.5 percent, from 6.1 percent in the same period.

The RoA of the sector stood at 1.4 percent in December 2018 compared with 1.6 percent in March 2018. The RoE decreased to 6.1 percent in December 2018 from 7.0 percent in March 2018.

The Survey said that NBFCs bring in diversity and efficiency to the financial sector and make it more responsive to the needs of the customers. It added that the NBFCs have played increasingly important role in resource mobilization and credit intermediation, thereby helping commercial sector to make up for low bank credit growth.