The COVID-19 pandemic has hit every sector and the financial sector is no stranger to its effects. As per current reports, Non-Bank Finance Companies (NBFCs) are estimated to showcase a 9.5% jump in their assets under management (AUM) in FY22. After moderate growth in FY21, Housing Finance Companies (HFCs) too are expected to witness a higher growth at 10% as the sale of houses is likely to go up. This understanding was derived by India Ratings and Research (Ind-Ra) after evaluating the expected outcome on NBFCs and HDCs for FY22.
The growth is expected to slow down by about 4-5% for NBFCs and 6.5% for HFCs in FY21. As expected, this change too is largely an effect of the coronavirus pandemic. Ind-Ra data also emphasized on the improvement in system liquidity. A large number of non-bank institutions have prepared by strengthening their capital buffers. This has helped the sector move towards higher loan disbursals.
There is an apparent wide differential among NBFC funding costs. This may act as one of the strong factors why the sector may move towards consolidation. It is especially going to be apparent among sectors that have a thin margin profile while offering products that are low on the differentiation aspect. However, the strong regulatory support put in place during FY21 has ensured that institutions have adequate liquidity.
All being said and done, the agency has predicted that wholesale NBFCs are likely to face challenges in FY22 from the perspective of asset quality. The negative outcome is likely to continue with this aspect.
Government’s Role in Moderating the Pandemic Impact
The government has introduced several schemes over the years, and these have ensured that the stress of the pandemic does not deeply impact the working of financial institutes. Schemes such as the Pradhan Mantri Awas Yojana (PMAY) have worked to soften the delinquencies. Alternatively, there has been a moderate addition to Gross Non-Performing Assets (GNPAs). The agency has also pointed out the possibility that overall stressed assets are likely to be much higher than the Reserve Bank of India’s estimates of 8%.
As per a RBI report, the system-level stressed assets for NBFCs remained at 8% as of September 30, 2020. It also estimated that the overall stressed book is likely to range between 9.5-11%, with 1.5 -3% of the book getting restructured. There was also an expected addition of 1.5% expected to be the GNPA.
Also checkout the PMAY list.
Prior to the invasion of the coronavirus, many NBFCs had raised capital. Some of the NBFCs continued to raise capital even during difficult times. This helped the institutes wade through the difficult times and effectively provide the pandemic-related provisions. The hit from the pandemic was borne in FY21 itself and this is expected to aid non-banks in normalising the lost credit in FY22.
Growing Competition Among Banks
As per the report, there is also likely to be a growing competition among banks for a given few products such as mortgage and loan against property. NBFCs are likely to push their limits on working within their strengths to grow larger with vehicle financing, unsecured lending, gold loans, and more. These sections do face as much competition from large banks.
Large banking institutes are more likely to concentrate their efforts on customer retention. They will also growingly deliver customized products that cater to the needs of each type of consumer base.
Closing Regulatory Gaps
The ratings agency has also noted RBIs move towards bringing about scale-based regulations. These regulations will aid in closing the current gap that is prevalent among banking and non-banking institutions. The implementations may work towards pushing both sectors to realign their business strategies. Ind-Ra also stated that there could be a possibility of big multi-product NBFCs migrating towards the banking platform. However, the absence of regulatory dispensation and other aspects, such as the need for high cash reserves, could cause hiccups in the transition.
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