Profitability of NBFCs may be impacted due to loan impairment, low demand: RBI – The Economic Times

Clipped from: https://economictimes.indiatimes.com/industry/banking/finance/profitability-of-nbfcs-may-be-impacted-due-to-loan-impairment-low-demand-rbi/articleshow/80012924.cms?utm_source=ETTopNews&utm_medium=HPTN&utm_campaign=AL1&utm_content=23Synopsis

The stronger and the deposit-taking NBFCs may however fare better as many have reported strong revival in disbursements and collections, almost to pre-COVID levels, the regulator observed.

Profitability of non-banking finance companies (NBFCs) may be impacted due to loan impairment, lower credit demand and a tendency to preserve cash, Reserve Bank of India said in its report on Trends and Progress of Banking in India.

The stronger and the deposit-taking NBFCs may however fare better as many have reported strong revival in disbursements and collections, almost to pre-COVID levels, the regulator observed.

“Challenges faced by the sector were exacerbated by the COVID-19 pandemic, causing funding constraints and triggering asset-quality concerns,” said the report, released Tuesday.

Asset quality of the NBFC sector deteriorated as slippages rose in 2019-20. Till the second quarter of 2020-21, impairment in asset quality intensified while the RBI-driven loan moratorium delayed the asset classification.

The negative impact of pandemic was relatively higher on NBFCs compared to banks since they were unable to function during the initial phase of lockdown. Sources of funds, especially for small and mid-sized NBFCs, dwindled on reduced risk appetite of banks for low rated and unrated exposures.

“Financing conditions facing them were further affected by redemption pressures of the mutual fund industry, resulting in widening of spreads. On the demand side, the prevailing economic contraction subdued credit offtake,” RBI said.

The impact was particularly pronounced for non-deposit taking NBFCs.

However, many NBFCs have made additional provisioning as per expected credit loss norm and bolstered their capital position by ploughing back dividends, the regulator said. NBFCs as a segment also remained well-capitalised as compared to banks.

The segment has been struggling to cope with liquidity stress and growth in balance sheets fell in 2019-20 due to risk aversion of lenders following the default of IL&FS in the second half of 2018 after two years of strong tailwind. Credit intensity, as measured by NBFCs’ credit to gross domestic product (GDP) ratio reached an all-time high of 12.2% in 2018-19 before moderating to 11.6% in 2019-20.

Industry remained the largest recipient of credit extended by the NBFC sector, followed by retail loans and services. The share of the retail loan portfolio increased in 2019-20 with a corresponding fall in the shares of all other sectors.

Credit to agriculture, industry and services recorded absolute declines, while the retail sector expanded at a slower pace during 2019-20. During 2019-20, retail loans were driven up by housing loans and vehicle loans. There was a contraction in credit to agriculture, mainly due to the shift in lending by NBFCs-MFI to industry.

Lending to micro, small and medium enterprises (MSME) by NBFCs however picked up in 2019-20, thanks to growth in lending by NBFCs-MFI, especially in the micro and small credit segment.
(Catch all the Business NewsBreaking News Events and Latest News Updates on The Economic Times.)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s