The majority of non-banking finance companies (NBFC) are well capitalised and are less likely to face capital adequacy risks going ahead, the Reserve Bank of India (RBI) said in its Financial Stability Report (FSR). The asset quality of the sector has significantly improved and NBFCs are less likely to face capital adequacy shocks even in a high-risk scenario.
In the baseline scenario, gross non-performing assets of the NBFC sector is likely to increase to 6.73%, following which the capital adequacy ratio (CAR) will fall 50 basis points (bps) to 23.83%, according to RBI estimates. However, the CAR of 12 NBFCs will fall below the required 15% levels.
To examine the impact of credit risk shocks to the sector, the RBI created a sample of 155 NBFCs and tested risks at the baseline and stress scenarios.
The gross NPA ratio under the high-risk scenario will increase to 9.39%, with the capital adequacy ratio of the sector declining by 82 bps to 23.51%. In that case, the capital adequacy ratio of 15 NBFCs will fall below the required levels.
The gross NPA ratio of NBFCs under consideration was 4.6% by the end of the financial year ended March 31 while the capital adequacy ratio of the NBFC sector stood at 26.7%.
In case of baseline mismatch in liquidity conditions, where cash outflows are higher than inflows, 10 of the 155 NBFCs are likely to face negative cash flows. NBFCs have benefitted from regulatory dispensations and liquidity operations of the RBI during the pandemic period, the central bank noted.