NBFC crisis may slow down GDP growth, says Moody’s
MUMBAI: Rating agency Moody’s on Thursday said liquidity constraints faced by some non-banking financial companies (NBFCs) in India will likely tighten credit supply and slow gross domestic product (GDP) growth to just above 7% for FY19 and FY20.
“This result is below an estimated 7.4% outturn in the fiscal year ending March 2018 and below the pick-up in growth that we envisaged a few months ago,” said Michael Taylor, managing director and chief credit officer for Asia Pacific.
A report from Moody’s said the growth outlook for India has weakened over the past few quarters as a result of higher oil prices and sharp depreciation in the rupee. That apart, tightening liquidity conditions have also contributed to a weaker growth outlook. However, it expects robust private consumption and government-led investment to support growth to an extent.
“The challenges in the NBFI (non-banking financial institution) sector further weigh on India’s growth prospects,” Moody’s said, adding that NBFCs have accounted for an increasing share of credit to the Indian economy—about 17% of the total credit in March 2018, compared to 13% in March 2012.
According to the rating agency, following the recent default by IL&FS, NBFC credit supply is expected to decline and lead to a period of tightening credit availability in the economy over the next several quarters. “Should challenges in the NBFI sector intensify and constraint credit supply further, we see additional risk to economic growth as impacts of the tighter credit transmit throughout the economy,” Moody’s said.
The report said public sector banks, which account for around 70% of system loans, will not be able to increase their lending to offset the slowdown in credit provided by NBFCs, because such banks are capital-constrained and unlikely to receive further capital allocation beyond what has been announced by the government.
A slowdown in credit provision from NBFCs, Moody’s said, will have a direct knock-on impact on the overall credit supply to the economy because most Indian banks lack adequate capital to expand their lending. “We expect banking system loan growth to remain broadly unchanged, which implies a net slowdown in overall credit supply to the economy.”
Moody’s said it does not expect any further pick up in private sector banks’ lending to compensate for NBFC shortfalls. The rating agency pointed out that these banks are already reporting strong loan growth and demonstrate significant exposure to NBFIs, ranging from 6% to 15% of their loan books. It also cautioned that aside from lower supply of credit and overall higher borrowing costs, a slowdown in NBFC credit will directly weaken credit access by several borrowing groups since non-banks have lent heavily to retail borrowers and account for one-third of the country’s retail loans.