01/05/2019 The NBFC prescription | Forbes India

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The NBFC prescription
Why they need to focus on a more robust asset­liability management framework and
diversify their borrowing mix

BY AJAY SRINIVASAN (HTTP://WWW.FORBESINDIA.COM/SEARCH.PHP?SEARCHTEXT=AJAY+SRINIVASAN)

5 min read

PUBLISHED: Jan 8, 2019

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01/05/2019 The NBFC prescription | Forbes India

Non-Banking Financial Companies (NBFCs) and

Housing Finance Companies (HFCs) have grown
strongly, especially in the last three to four years. The
share of NBFCs and HFCs in the total credit system has
been steadily rising—from 15.2 percent in FY14-15 to 19.2
percent in FY18. This growth was partly due to the
slowdown in lending by banks, particularly public sector
banks (PSBs), and partly due to the model of these
entities, builta on quicker response times and last-mile
connectivity.

With 11 PSBs under the Reserve Bank of India’s (RBI)

Prompt Corrective Action (PCA), there has been some
pressure on the supply of credit. The overall credit
growth of banks under PCA was negative for the three
financial years up to FY17-18. Some amount of the credit
demand in the economy, therefore, got channelled to NBFCs and HFCs, leading to the increase in
their share in overall credit.

Interest rates have been falling from 2014 till late-2017. Mutual funds (MFs) are an attractive option
for investors in such a scenario. Hence, assets under management (AUM) for MFs witnessed a
significant growth, rising by about 75 percent between March 2016 and March 2018, and adding more
than ₹9 lakh crore. A significant part of this came in the year after demonetisation. Commercial
papers (CP, short-term borrowings of up to 90 days) issued by NBFCs to MFs increased from about
₹50,000 crore in March 2016 to ₹1.2 lakh crore in September 2018.

This combination of reduced bank lending and easy availability of low-cost funds in the wake of
continued credit demand in the economy contributed to the NBFC-HFC growth story in recent years.
NBFCs and HFCs accounted for about 35 percent of the incremental credit flow in FY16-17 and FY17-
18, up from about 15 percent in FY12-13 and FY13-14. It would be fair to say, therefore, that the
growth in the economy in this period was, to a good extent, fuelled by these entities.

A series of events in 2018 impacted this growth story. First, interest rates started to toughen up from
the beginning of 2018. For instance, State Bank of India (SBI) increased its one-year marginal cost of
funds-based lending rate on March 1, and then again on June 1. Then, in the June policy review of
RBI, the repo rate was increased for the first time in four-and-half years. This was followed by another
repo rate hike in the August policy review. In addition, there were credit concerns that started
emerging in the sector, without distinguishing the different players and models in the market. To be
fair, the NBFC sector is diverse, with a wide variety of models based on products, customer segments,
capital structures and ownership structures.

At the same time, macroeconomic factors became more challenging. Brent crude crossed $86 in early
October, and the rupee depreciated rapidly, further aggravating the liquidity situation. There was

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01/05/2019 The NBFC prescription | Forbes India

significant concern on what would happen to CPs outstanding to NBFCs, a lot of which would mature
in November.

Then, the situation eased a bit. The RBI undertook significant open-market operations from
September to December to inject liquidity in the system, while SBI announced a significant corpus to
buy assets from NBFCs and HFCs. The National Housing Bank (NHB) offered to increase its
refinancing to HFCs. In end-November, the RBI eased the loan securitisation norms for NBFCs. In the
policy reviews of both October and December, the repo rate was unchanged. The macroeconomic
factors turned favourable. Brent crude dropped significantly from its peak levels of early-October and
the rupee also strengthened. It is estimated that rates in the CP market eased considerably over this
period and a large chunk of the CPs held by MFs were renewed, thus providing NBFCs and HFCs with
short-term liquidity.  

However the medium- to long-term funding of the sector still needs to be addressed. Crisil estimated
in early-December that NBFC growth may fall by half, to 9 to 10 percent, in the second half of FY18-
19. This will impact sectors that are being funded in a bigger way through NBFCs and HFCs, including
the real estate sector, and small and medium enterprises.

In order to address the situation, several steps need to be taken. Overall liquidity will have to remain
easy. Other pools of long-term money such as insurance, pensions and even employee provident funds
might need to be explored for funding this sector. The RBI could look at relaxing the risk weight for
banks on their NBFC lending. Steps will be required to increase bank flows to NBFCs and HFCs, not
just to buy portfolios but to fund growth.
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01/05/2019 The NBFC prescription | Forbes India

While policy action is welcome, there are some lessons for NBFCs and HFCs as well. An asset-liability
mismatch—specifically, having long-term assets funded by short-term borrowings like CPs—is not a
desirable situation for an NBFC. They, therefore, need to focus on a more robust asset-liability
management framework and also look at diversifying their borrowing mix to reduce over-dependence
on any one source of lender or instrument.

While the peak of the recent liquidity crunch may be over, we are yet to return to normal. Fostering
the growth of NBFCs and HFCs is important for the economy as they complement banks, and provide
credit to parts of the economy that banks can’t or don’t. Credit is the lifeblood of an economy, and
given the issues that banks are facing, alternative sources of credit augment economic growth. In the
absence of a vibrant bond market, medium- to long-term funding for such entities can come from
other pools of capital, namely banks, mutual funds, insurance and pension. Other than these,
accessing public money directly and accessing offshore markets are options, but are not available to
all. We also need to think about overall systemic risk and what could be done to fund the larger
NBFCs and HFCs over time as they become larger than midsize banks and need access to funds.

(Ajay Srinivasan is chief executive of Aditya Birla Capital Ltd. His thoughts and opinions expressed
here are his own, and do not necessarily represent the official position of Aditya Birla Group or its
subsidiaries.) 

(This story appears in the 18 January, 2019 issue of Forbes India. You can buy our tablet version
from Magzter.com (http://www.magzter.com/IN/Digital18/Forbes­India/Business). To visit our
Archives, click here. (http://www.forbesindia.com/archive/))

SHOW LESS

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01/05/2019 The NBFC prescription | Forbes India

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Non-Banking Financial CGenerateompanies (http://www.forbesindia.com/search.php?searchtext=Non-

Banking+Financial+CGenerateompanies) NBFC (http://www.forbesindia.com/search.php?searchtext=NBFC)

Housing Finance Companies (http://www.forbesindia.com/search.php?searchtext=Housing+Finance+Companies)

HFCs (http://www.forbesindia.com/search.php?searchtext=HFCs) National Housing Bank

(http://www.forbesindia.com/search.php?searchtext=National+Housing+Bank) SBI (http://www.forbesindia.com/search.php?

searchtext=SBI) RBI (http://www.forbesindia.com/search.php?searchtext=RBI)

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01/05/2019 The NBFC prescription | Forbes India

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