A recent report has indicated that non-banking financial companies in India could experience limitations on their loan growth this fiscal year due to funding constraints.
According to the report, the non-banking financial companies sector may face a tough time in the near future, as it struggles with high borrowing costs and credit risk concerns. The report highlights that the liquidity crisis, which started in 2018, has impacted the NBFC sector and has forced many of them to resort to alternative sources of funding, such as securitization and direct assignments.
The report also states that the recent COVID-19 pandemic has worsened the situation, as it has led to a slowdown in economic growth and increased the credit risk of borrowers. This has further increased the cost of funds for NBFCs, making it difficult for them to extend credit to new customers or even to existing ones.
As per the report, the credit growth of the non-banking financial companies sector has slowed down significantly in the last few years, and the trend is expected to continue in the near future. It highlights that the growth rate of NBFC credit has fallen from 19.5% in March 2019 to 10.3% in March 2021, indicating a sharp slowdown.
The report identifies that the funding constraints that non-banking financial companies face are a result of the lack of long-term funds available in the market. It states that the availability of long-term funds for NBFCs is critical, as it enables them to extend long-term loans to their customers. However, the report notes that the availability of long-term funds in the market has been limited due to a lack of investor appetite for long-term debt instruments.
Furthermore, the report states that the current regulatory framework has also made it difficult for NBFCs to raise funds. It points out that the Reserve Bank of India (RBI) has implemented several measures to regulate the non-banking financial companies sector, such as increasing the minimum investment grade rating for securitization transactions and reducing the limit for exposures to a single borrower. These measures have made it more difficult for NBFCs to raise funds and have led to an increase in their borrowing costs.
The report suggests that the government and the RBI need to take steps to address the funding constraints faced by the non-banking financial companies sector. It recommends that the RBI should ease the regulatory norms for NBFCs, allowing them to raise funds more easily. Additionally, the government could introduce tax incentives for investors who invest in long-term debt instruments issued by NBFCs, which could increase the availability of long-term funds in the market.
The report also suggests that non-banking financial companies need to focus on diversifying their funding sources to reduce their reliance on banks and other financial institutions. It recommends that non-banking financial companies should explore the option of issuing bonds, which could provide them with an additional source of funding. Non-banking financial companies should also look into tapping into new markets, such as mutual funds and pension funds, to diversify their funding base. Furthermore, the report suggests that non-banking financial companies should focus on improving their credit risk management processes in order to minimise losses due to defaults.
In conclusion, the report highlights that the funding constraints faced by NBFCs could hinder their loan growth this fiscal year. It suggests that the government and the RBI need to take steps to address these constraints, allowing NBFCs to raise funds more easily and enabling them to extend credit to their customers. Furthermore, NBFCs need to focus on diversifying their funding sources to reduce their reliance on banks and other financial institutions. Only then can the NBFC sector regain its momentum and contribute to the growth of the Indian economy.
