The 2019 election results signal the beginning of a new journey of hope and economic revival. It’s pretty clear that the incumbent government will come to power again. The people of India have given the mandate in favour of stability and continuity. So, the government should now accelerate its inclusive development agenda and address the concerns which is stalling retail consumption and slowing down MSME sectors that spur employment in semi-urban and rural markets. One such sector which needs immediate fillip is the non-banking financial companies (NBFC) sector, which is facing an estimated funding gap of Rs 3.4 lakh crore. NBFCs foster financial inclusion and spur self-employment in our economy where services and manufacturing are key drivers of GDP. Forty three percent of mutual funds lending to NBFCs and HFCs (housing finance companies) is in the form of commercial papers (CPs); 80% of these are maturing over the next three months. MFs have around Rs 3.2 lakh crore exposure to NBFCs (including HFCs) and Rs 1.1 lakh crore of this matures over the next three months.
Over the last few years, the NBFC credit growth has been at 25-30% CAGR. It is considerably slowing down due to a liquidity crisis. There is a need for concrete steps to fuel cash flows into the system to improve demand and supply in the NBFC industry, which is considered the lifeline to rural credit and the backbone of financial inclusion. Some of the immediate measures that the government could consider are addressing the funding gap and the liquidity squeeze. One of the largest priorities for the new government is to bolster economic activity through last-mile credit dissemination by NBFCs—a measure that could help keep growth at 25%. This would mean that the sector would need additional funding of Rs 2.1 lakh crore. The liquidity gap arising out of drying CPs and additional funding would mean creation of liquidity window of Rs 3.2 lakh crore. During the period of liquidity crunch, some NBFCs and HFCs resorted to aggressive sell-down of their loan book via direct assignment/securitisation. As a result, sell-down volumes by NBFCs increased 71% in nine months of FY19 compared to the entire FY18.
This would call for extraneous measures and the new government has its work cut out for it at a time when industrial growth and consumption are witnessing slowdown. In the short term, the government needs to look at improving the on-ground situation by improving liquidity available to NBFCs. For instance, a liquidity window of well-rated securitisation pool or on tab securitisation by banks can be quicker and surer ways of immediate alleviation. The government can also open up investment through into AA- and above rated entities by pension funds, insurance companies and cash surplus government owned institutional investments. The well rated AAA/AA+ securitised pools could be redefined as high-quality liquid assets (HQLA) attracting investments. Large government-backed investors such as pension funds, Employees’ Provident Fund Organisation, and Life Insurance Corporation need to step in to provide room to address the funding gap.
To implement long-term structural changes, the government needs to address the slowdown in industrial growth. One of the consumption-driven sectors which need prompt attention is automobile where recent sales figures for April 2019 shows that auto sales have fallen to their slowest in eight years. Even the housing sector has been affected by the liquidity crisis which has triggered mergers and acquisitions. This can impact allied sectors such as cement, steel, iron, and other building material which generate substantial informal employment.
Public sector banks in which the government holds majority stake need to be nudged for opening up credit lines to NBFCs with meritorious track record. Banks are reluctant to lend to NBFCs in the current environment. While some of them have curtailed or withdrawn existing credit lines, some are drawing a cap on additional lines. In the wake of the NBFC crisis in September 2018, credit lines of banks have been extensively utilised by a handful of better-rated NBFCs which had been tapping debt capital markets and short-term funding from commercial paper. Thus the available pie for even well-rated NBFCs has shrunk considerably. This is a case for review of the NBFC sectoral cap by banks, and, enhancing the same by 10% should happen soon. The circuitous CP cash which found its way into banks post redemption needs to be ploughed back into circulation. One of the key priorities for the new government should be to open the liquidity tap for NBFCs of prominence and proven business models.
In the wake of defaults by a few NBFCs, mutual funds are cautious about investing in them. Reluctance to invest also stems from MFs hitting their sectoral limits and some of it is also driven by their investor perception. Measures which push large investors to invest in well-rated NBFCs need to be considered.
Retail NBFCs registered a healthy credit growth of 22% in FY2018. The strong growth trend continued in H1 FY2019 as credit grew by about 24-25% YoY—the highest in the last four-five years. Retail NBFC credit stood at Rs8.4 lakh crore (excluding that of Capital First Ltd, which merged with IDFC Bank in December 2018) as on December 31, 2018. ICRA recently stated that it expects credit growth to remain moderate till H1 FY2020 and would revive only in H2 FY2020. The assets under management of retail-NBFCs would register a growth of 16-18% in FY2019 while the growth would moderate further in H1 FY2020 because of the ongoing liquidity conditions and the general election in Q1 FY2020. Revival could be anticipated in H2 FY2020. ICRA expects the NBFC credit growth in FY2020 to be about 15-17% and retail-NBFC credit to touch Rs 10 lakh crore. Growth could be higher if the fund flow to NBFCs improves.
The government’s main move in the financial sector should be to address the stalled money movement at banks. Investors need to be incentivised to invest in the NBFC sector both on the equity and debt side, thus boosting short-term and long-term funding, providing much-needed relief.
Views are personal.
The author is CEO at Magma Housing Finance.
