28 June 2019: There is a need for greater surveillance over large housing finance companies (HFCs) and non-banking financial company (NBFC), the Reserve Bank of India (RBI) said on Thursday in the June 2019 edition of its Financial Stability Report (FSR). It cautioned that any contagion arising from the insolvency of any large NBFC or HFC could result in losses comparable to those caused by the big banks.
It also said contagion losses arising out of a private NBFC or HFC failure shows such losses are dominated by them, as the top five solvency loss-inducing institutions are all HFCs.
Stress tests results for individual NBFCs indicate that under two scenarios of increase in gross non-performing asset (GNPA) ratios, around 8% of companies will not be able to comply with the minimum regulatory capital requirement of 15%, .
Around 13% of them will not be able to comply with the minimum regulatory capital to risk assets ratio (CRAR) norms under the third scenario of stress at three times the standard deviation (SD). The first scenario is that of 0.5 SD, while the second is that of 1 SD.
GNPAs of the NBFC sector as a percentage of total advances increased to 6.6% in 2018-19 from 5.8% in 2017-18. However, the net NPA ratio declined marginally to 3.7% in 2018-19 from 3.8% in 2017-18. As on March 2019, the CRAR of the NBFC sector moderated to 19.3% from 22.8% in March 2018.
The central bank highlighted risks to NBFCs’ credit standards emanating from rapid growth in their exposures to four consumer products — auto loans, home loans, loans against properties and personal loans. “Given the substantial growth rate in exposure to these sectors, a possible concern is dilution in credit standards,” RBI observed, adding, “A look at the evolution in delinquency levels in each of the segments shows that NBFCs as a group have been leading delinquency levels in almost all the sub-segments of consumer credit (except in loans against property where it stands a close second to public-sector banks) when uniform delinquency norm of 90 days past due (dpd) is applied.”
Even as their importance in credit intermediation is growing, recent developments in the domestic financial markets have brought the focus on the NBFC sector, including HFCs, especially with regard to their exposures, quality of assets and asset-liability mismatches (ALM). The liquidity stress in NBFCs reflected in the third quarter of FY19 was due to an increase in funding costs as also difficulties in market access in some cases, the RBI said. “Despite the dip in confidence, better performing NBFCs with strong fundamentals were able to manage their liquidity even though their funding costs moved with market sentiments and risk perceptions,” the central bank added.
In the commercial paper (CP) market, the absolute issuance of CPs by NBFCs has declined sharply relative to its level before defaults by IL&FS entities, RBI said. During the stress period, CP spread of all entities had increased, particularly that of NBFCs, highlighting a reduced risk-appetite for them. Subsequently, the CP spread for NBFCs has reduced and its gap vis-à-vis other issuers has narrowed. “Thus, in a way the IL&FS stress episode brought the NBFC sector under greater market discipline as the better performing companies continued to raise funds while those with ALM and/or asset quality concerns were subjected to higher borrowing costs,” the FSR noted.
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