Re­search Notes – NBFCs

Banking Frontiers - - Contents -

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.

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