The Reserve Bank of India (RBI) on Tuesday said the profitability of non-banking finance companies (NBFCs) may be “dampened” on account of asset quality issues and lower credit demand.
“Going forward, the profitability of NBFCs may be dampened due to loan impairment, lower credit demand, and a tendency to preserve cash,” the RBI said in its Trend and Progress report.
Due to loan moratoria and asset classification standstill, asset quality shored up. However, many NBFCs have made additional provisioning as per expected credit loss norm and bolstered their capital position by ploughing back dividends, the RBI report said.
The report noted that growth in NBFCs’ balance sheets decelerated considerably in 2019-20. “However, NBFCs remained well capitalised with resilient asset quality vis-à-vis that of SCBs,” the RBI said.
In H1 of 2020-21, green shoots were visible as loans and advances rebounded. Challenges faced by the sector were exacerbated by the COVID-19 pandemic, causing funding constraints and triggering asset-quality concerns, the report said.
The RBI will remain cautious in maintaining the sector’s stability amid challenges, the RBI said.
“The Reserve Bank, on its part, remains steadfast and resolute in maintaining the sector’s (NBFCs) long-term resilience and preserving financial stability,” the RBI said in the Trend and Progress report on Tuesday.
Though economic activity is expected to remain muted in FY 2020-21, strong NBFCs maintain a ‘cautiously optimistic’ view and are expected to perform well as many have reported strong revival, almost to pre-COVID levels, in disbursements and collections, the RBI report said.
MFs lose confidence in NBFCs?
The waning confidence of mutual funds in NBFCs’ papers continued in 2019-20 and 2020- 21 (up to June 2020) even though their investments were largely limited to a few large and well-rated NBFCs, the RBI said. Growth in mutual funds’ subscription to NCDs of medium NBFCs declined from the second half of 2019-20.
In the case of CPs, mutual funds’ confidence was dampened by prevailing market pessimism and liquidity stress. “While mutual funds held only a minuscule share of NCDs and CPs of small NBFCs, they exited in March 2020 and June 2020 due to heightened risk aversion in the aftermath of COVID-19,” the RBI said.
Bank lending to NBFCs
In 2019-20, banks’ subscription to NBFCs’ debentures and CPs declined on risk aversion, the RBI said. In H1 of 2020-21, overall bank exposure to NBFCs continued to grow due to higher direct lending by banks as well as their investment in debentures, the report said, adding growth in lending via CPs (commercial papers) to NBFCs was in negative territory in September 2020 following a pick-up in Q1 of 2020-2021.