Opinion | NBFCs need funds -- not just for high-street projects, but also roadside vendors

While discussions on ‘Section 7’, a new economic capital framework of RBI and jurisdictional issues, will likely dominate interest among media and the commentariat, money market observers will be closely looking for cues on what the central bank plans to keep the non-banking finance companies (NBFCs) well-funded.

The need to keep the funds rolling for NBFCs requires urgent attention, not just to keep large projects on track, but also to add fuel to India’s consumption spending machine, as well as to aid the small traders and businessmen.

Examples abound where roadside vendors, small shop owners, auto-rickshaw drivers and others have been able to turn their lot around by borrowing small amounts from NBFCs to expand their business.

For those who usually lack access to formal credit, a tenured loan from a regulated finance company is also a ticket to a world of financial services. Besides freeing them from the clutches of ‘shadow’ money lenders, whom RBI cannot oversee, it also gives them a ‘credit score’ that allows them cheaper borrowing next time they need to borrow.

There are millions of people in India, who have the ability to repay but do not qualify for a loan because banks are too selective and demand citizens have a credit score before they apply.

This partly, if not substantially, follows from two facts: (a) they earn most of their income through cash, and (b) they spend most of it in cash.

With limited or no banking activity, millions of such people do not have a credit score, virtually leaving them out of the booming consumption-driven economy.

How long will one have to save money in order to accumulate enough to buy a television? Even if one does achieve the targeted savings goal, will he be able to buy the television? Perhaps not, since the price of the television would have risen because of inflation.

That’s probably why NBFCs are important.

Over the last four years, NBFCs have reported better performance in most parameters when most of the commercial banking system was saddled by a mount of bad loans.

As of March 2018, there were 11,402 RBI-registered NBFCs, with an aggregate balance sheet of Rs 22.1 lakh crore.

Loans given by NBFCs have been growing at over 15 percent in the last three years, more than double the credit growth that commercial banks reported during this period.

In 2017-18, loans given out by banks grew 6.9 percent, while those by NBFCs increased by 21.2 percent. The gross non-performing asset (GNPA) ratio for NBFCs fell to 5.8 percent of total advances in March 2018 from 6.1 percent in March 2017.

This implies that as of March 2018, of every Rs 100 that NBFCs lent, Rs 5.8 has turned bad. Contrast this with commercial banks where, at an aggregate level, gross NPAs rose sharply to 11.6 percent by March 2018.

The inter-connections of the financial system are expected to get deeper in the coming years, with NBFCs among the largest net receivers of funds from the rest of the system.

While NBFCs' share capital growth decelerated, borrowings grew at 19.1 percent in 2017-18, implying that NBFCs are taking more loans than before from banks and other institutions to lend to their clients.

NBFCs were the largest net borrowers of funds from the financial system with gross payables of around Rs 7,17,000 crore in March 2018. Nearly half of these loans to NBFCs came from banks (44 percent), followed by mutual funds (33 percent) and insurance companies (19 percent).

There is no refuting the fact that NBFCs’ growing reliance on bank funds need appropriate safeguards to deal with potential systemic risks. That said, it is also equally important to keep the liquidity tap open through new windows.

Most NBFCs do not have the funding options available to a conventional bank. It may be worthwhile to examine whether they deserve access to refinance schemes that RBI can oversee with strict regulatory oversight.