Research Notes – NBFCs
NBFCs in India, which had a 23% market share at the end of FY 2019, had gained share from state-owned banks, which had the highest share of system credit, says Fitch Ratings. NBFCs grew rapidly during FY2014-FY2019, with the large institutions expanding at a CAGR of 20% as they filled gaps in the market left by capital-constrained state banks, and kept the system-wide credit-to-GDP ratio from falling more significantly.
Their growth was in some cases fuelled by higher leverage and greater reliance on short-term wholesale funding, raising the number of ALM mismatches. These vulnerabilities, together with governance problems, were factors in the failures of IL&FS and, more recently, Dewan Housing Finance Company.
However, not all NBFCs fitted this narrative. Leverage has not changed significantly for most of the large NBFCs over the last 5 years. Expansion against a backdrop of low interest rates and healthy market liquidity has been supported by internal capital generation and shareholder equity.
Fitch Ratings says most of the NBFCs that operate with higher leverage - which elevates their solvency risks - are housing and wholesale finance companies. The majority of retail-focused NBFCs have leverage of less than 5x.