2018 was a blowout year for Non-Banking Finance Companies (NBFC) on all counts. NBFCs, though not all of them, paid a heavy price for spreading their cheese too thin. In their bid to step into the space vacated by capital constrained Public Sector Banks (PSBs), NBFCs went on a reckless credit expansion, without taking into account the asset-liability scenario. The result is there for everyone to see. Many went bust and out of business in no time, and most others had to run helter-skelter seeking bail-out funds from investors. Credit risk perception has increased significantly, with investors developing cold feet in opening fresh funding taps to the sector. The market too has punished them heavily, with stock prices of the listed non-banks hitting rock bottom.
The situation has changed since then, with some of the measures taken by the Government, stopping the crisis developing into a contagion and spilling over to other sectors. However, NBFCs will take most of this baggage into 2019, as the ground reality remains more or less same, as was in 2018. On the whole, the outlook for the sector for the next year is still looking weak.
But this is not to say that all is lost for them. The gradual improvement in liquidity situation indicates that stabilisation is on the cards over the next few months.
However, liquidity can no longer be taken as a given. With the regulatory fist tightening on them, cash will be coming to only solvent NBFCs. To put it simply, liquidity situation for NBFCs with lower creditworthiness may continue to remain tight.
Another issue of equal importance is the asset quality of NBFCs. Going by the recent trend, asset quality is likely to remain mixed. The most impacted will be the wholesale financiers, while vehicle financiers appear to be relatively insulated from such pressures, since the level of Non-Performing Assets (NPAs) for them remains in a manageable range.
Another issue of concern for NBFCs going into 2019 will be a tepid growth in the loan book. As the consumption theme shrinks, loan growth is expected to moderate going forward despite strong demand. Here again, wholesale financing will be the worst hit. Overall, the sector will grow at a significantly slower pace, and moderate growth is likely to be the new normal. Non-banks can simply forget about the "above the curve" growth they had seen a year ago.
The situation may be different in the retail segment. Since the demand at the ground level remains strong, companies are not much concerned about asset quality in this segment. But things will not be as rosy for the wholesale segment. As the refinancing market for projects or developer loans is likely to dry up, the construction finance and infrastructure segments could face some headwinds.
Most NBFCs and Housing finance Companies (HFCs) also indicate that liquidity has not been a constraint over the last few weeks though some of the players were going slow till November by maintaining adequate liquidity on their balance sheet.
However, risks in the developer lending segment and impact of likely implementation of RBI norms on external benchmarking of retail loans are the two aspects to watch out for in 2019.
After all the negative narrative above, NBFCs will still play a critical role in ensuring capital to a vast array of consumers. They have brought new borrowers into the ambit of formal finance with their underwriting skills and inculcating financial discipline among the borrowers. They are much less leveraged than the PSU Banks, and still account for close to 15% of the incremental credit in the economy, making NBFCs still very important and relevant to the system.
Therefore, to say that this is the end of the road for NBFCs is wrong and grossly misplaced. As good economic agents of change, they should learn that a fall in the pit is a gain in the wit. The gain in the wisdom is to avoid credit ebullience and try to learn to live within their means, and do their business as allowed by their capital base. It is important for them to grow in business while remaining solvent. As business gets tough, the tough among the NBFCs will get going. Therefore, the New Year resolution for NBFCs could be - "better to be safe than sorry".
(The author is MD & CEO of NBFC start-up LivFin.)
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