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Banks’ Woes could Mean More Business for NBFCs
The Economic Times  |  February 14, 2018

Shilpy Sinha Mumbai

The continued run of bank asset slippages promises NBFCs an extended Indian summer. With a mounting pile of bad loans pushing further back into the horizon the prospects of a sustained banking recovery, NBFCs could be in for a longer run of limited competition — and better business — at the expense of undercapitalised state-owned lenders.


NBFC business would likely benefit from the Reserve Bank of India’s (RBI) norms to make default resolutions time bound. Nonbanking financiers that had wrested market share from cash-starved government banks could further marginalise high-street lenders that must use fresh capital to provide for bad assets instead of expanding their loan books.


The ability of banks to lend has been constrained due to Basel III capital requirements and higher provisioning. At the same time, many niche NBFCs have come up over the years, lending to segments as diverse as gold, housing, infrastructure and retail.


“NBFCs will get a new lease of life with banks focusing on resolution,” said Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services. “Competition for NBFCs will come down and it would become easy to expand credit over the next 6-8 quarters.”


When bank credit growth slumped to 8.1% in FY17, the balance sheets of NBFCs expanded 14.5%, with loans and advances rising 16.4%.


“NBFCs have been enhancing their credit and we expect them to raise their share to 18% in the next two years,” said Krishnan Sitaraman, senior director &ndash financial sector ratings & structured finance ratings at CRISIL Ltd. “Within the NBFC sector, there are segments — some home loans, vehicle finance, wholesale credit and MSME — showing faster growth.”


The financial performance of NBFCs on parameters such as net profit, return on assets and balance sheet growth has been better than that of banks. NBFCs have reduced their exposure to bank funding and moved to debentures and bonds.


Gross bad loans of NBFCs fell to 4.4% in March 2017 from 4.9% in September 2016, bucking the rising trend of delinquency at highstreet banks.


Expectations were high that bank credit growth would rebound after the recap plan of Rs 2.11 lakh crore was announced in October 2017. After the announcement, a Crisil report had said that public sector banks would need up to Rs 1.75 lakh crore of capital until 2019 to meet Basel III requirements.


On Monday, the RBI withdrew existing debt restructuring schemes and tightened norms for resolution, and substituted the existing guidelines with a simplified generic framework for resolution of stressed assets. It has made resolution of defaults timebound, with the Insolvency and Bankruptcy Code becoming the main tool to deal with defaulters.


“Under the earlier dispensation, it used to take 4-5 years for recovery&hellip. The deadline under the new legislation will be lower,” said Sitaraman.