India's non-banking financial companies grew at a slower pace in second and third quarters of financial year 2020-21 on annual basis due to COVID-19-led disruptions and muted demand but continued to disburse credit. Wading through the thick of pandemic shows the resilience of the sector, the Reserve Bank of India (RBI) said in its monthly bulletin for May.
The consolidated balance sheet of NBFCs registered slower but double-digit growth in September and December quarters of FY21 at 13 per cent and 11.6 per cent, respectively, the bulletin said. Credit growth, during these quarters, stood at 4.8 per cent and 2.5 per cent, respectively.
"This deceleration compared to corresponding quarters of 2019-20 could be attributed to the COVID-19 induced economic slowdown and weak demand. However, this double-digit growth in an adverse macroeconomic environment points to the resilience of NBFCs, which were able to cushion the impact of the pandemic on their balance sheets through quick adoption of technology, policy support and reasonably strong fundamentals," the document stated.
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Liquidity enhancing measures that helped the NBFC sector through the pandemic troubles also led to favourable market conditions, reflected in the pick-up in debenture issuances. Mutual funds showed renewed interest in NBFC commercial papers, while banks' subscription of the same increased at a steady pace after Q1 FY21.
On trends in long-term and short-term borrowing, RBI said over 70 per cent of the NBFC borrowings are payable after 12 months and their share has remained stable, indicative of the growing market discipline in the shadow banking sector.
Under sectoral deployment of credit, the RBI bulletin noted that industrial sector remained the largest recipient of credit from non-deposit taking systematically important NBFCs (NBFCs-ND-SI) even as its share moderated between Q3 FY20 and Q3 FY21. Retail and services sectors were the other major beneficiaries and their share grew during this period. Agriculture saw the highest growth in credit disbursement among sectors, but that could be due to low base effect, RBI said.
"The profitability of NBFCs dipped in the immediate aftermath of the COVID-19 in Q1:2020-21, as businesses suffered economic losses due to nation-wide lockdowns. Both return on assets (RoA) and return on equity (RoE) deteriorated in Q1:2020-21 compared to the corresponding period in 2019-20. However, the situation improved marginally in Q2: 2020-21 as NBFCs' expenditures registered a steeper fall than income," the monthly bulletin said.
Asset quality of NBFCs witnessed improvement in 2020-21 till the third quarter. Nevertheless, the true extent of NPAs in the sector may be gauged in the upcoming quarters as the interim order by the Supreme Court on asset classification standstill was lifted in March 2021.
While the NBFC sector continued to grow during the first wave of coronavirus pandemic, the impact of the second will unfold only in the future, the central bank stated.
"Given the persistence of infections, the full effects of the lockdown and suspension of business on the asset quality of NBFCs will be evident gradually," it said in its monthly bulletin.