The persistent crisis of confidence in non-bank financial corporations (NBFCs) could weigh heavily on economic growth, as higher balance sheet constraints and higher financing costs could cause these shadow banks to slow down their lending, a report warns. However, this will boost the growth of the banks, which have long since yielded their share of the credit market to NBFCs, which accounted for between 12% and 15% of the total credits generated in the last two fiscal years.
Radhika Rao, economist at Singapore's DBS lender, warned that "the likelihood of tighter lending controls on NBFCs and tougher operating conditions would likely compromise their ability to expand their accounts, which would spur them toward their growth targets. ambitious … as a result, overall credit availability is expected to moderate, which will hurt growth. "
However, slower growth can reduce asset quality issues if additional financing is provided in the form of quality loans rather than high risk loans. The difficulties encountered by NBFCs, which have long credited the intensification of the flow of credit in the pockets where banks have not been able to operate, constitute a "negative risk" for the growth estimates of GDP established by DBS for FY19, ie 7.4% and a budget margin of 7.8%. later, she said.
Other barriers to growth are higher rates, reduced fiscal space and sub-standard spending for the private sector. NBFC's share of financing for small and medium-sized enterprises increased from 11.3% in mid-2018 to 8.4% two years earlier. In comparison, the share of public sector banks fell sharply during this period to 51% in June 2018, compared with 60% two years ago.
Non-bank financial companies have been hit hard by IL & FS's failures since September, resulting in a sharp compression of bank financing and a lack of investor appetite for their debt securities. This led to an increase in loan disbursements by banks in October, from 12.5% in September to 14.4%. This is explained by the fact that many NBFCs have shifted their borrowing on the capital / money markets to bank loans, especially those with unused / unused credit lines.
On the other hand, NBFCs also requested more lines of credit from banks as the cost of market-based borrowings increased, leading to a 44% increase in these loans since August, she said. "We continue to seek an increase in the banks' market share as the main source of commercial sector finance, as balance sheet constraints and higher financing costs are driving distribution companies to slow down their business. ready, "said Rao.
As funding costs increase, NBFC's commitments may be subject to larger revaluations than assets, including short-term borrowings, which poses refinancing problems. Although the large NBFCs can still manage their costs by exploiting public problems, the smaller ones will find it difficult to look for other sources of funding, which will affect their margins, forcing them to limit the expansion. their balance sheet.
At the same time, banks will not be able to meet the entire demand for misplaced funding, as at least half of the public sector banks are confined to rapid RBI remedies, which restricts them. to contract new loans availability of credit. Secondly, NBFCs, especially those specializing in the areas of microfinance, housing, auto finance, rural areas, etc., have thrived in pockets where traditional banks have a limited geographical reach, a lower appetite and the ability of traditional banks to contact such borrowers.
According to Sidbi, NBFC's share of MSME financing increased by 11.3 percent in mid-2018 from 8.4 percent two years earlier, reducing the market share of public sector banks to 51 percent. June 2018, compared to 60% two years ago. "Even if NBFCs in difficulty reduce their presence, it will be difficult for banks to fill this gap," says Rao.