Indeed, the performance of most NBFCs, over the past couple of years, has been less than ordinary, especially post the ILFS collapse in August 2018.
While it is clear banks are going to see a rise in defaults over the next couple of years as growth collapses, the asset quality at NBFCs could see a bigger deterioration. As Moody’s has pointed out, NBFCs are in a more troubled spot than banks given their exposures to riskier segments. While the government realises that this has serious implications since banks have large exposures to NBFCs, and has provided for a lifeline of Rs 75,000 crore in its economic package, it is unlikely that much of this will flow to them. For one, since the government-guaranteed Rs 30,000 crore corpus can be invested to buy NBFC, HFC, and MFI debt both in the primary, and secondary markets, the apprehension is that banks will buy the bonds from mutual funds rather than subscribe to NBFC debt issuances.
In effect, therefore, NBFCs and HFCs may not get the liquidity they are looking for. Again, the Rs 45,000 crore partial credit guarantee scheme, under which the government will partially guarantee the first 20% loss on primary issuances of bonds and CPs of entities rated AA and below, including unrated NBFCs, is unlikely to enthuse lenders. Remember, banks opted to borrow just about half the Rs 25,000 crore line of credit offered to them by RBI for investments in NBFCs, HFCs, and MFIs, even though this was at a low rate of interest.
Weaker NBFCs have only themselves to blame if banks are unwilling to lend to them; banks today are very risk-averse in general, and are unlikely to take an exposure to shadow bank credit because they stand to lose 80% of the money if things go bad. And, the fact is that more of these lenders are going to be stressed in the coming days as the economy slows further. Indeed, the performance of most NBFCs, over the past couple of years, has been less than ordinary, especially post the ILFS collapse in August 2018. Some, such as DHFL and HDIL, have been rank disasters.
While it is true that NBFCs reach out to individuals and small businesses that are unable to access organised credit, it is equally true that many have built up questionable exposures to high-risk areas like real estate, and have created risky loan products against property. Several of them were found to have serious asset-liability mismatches, borrowing three-month money from mutual funds. It is unfortunate that private sector shadow banks have been allowed to build up a portfolio of over Rs 20 lakh crore without much monitoring by the regulators. An analysis by HSBC estimates that, adjusting for debt of AAA-rated NBFCs and debt of NBFCs backed by government, banks, and large conglomerates, the residual quantum of debt would amount to roughly Rs 4.5 lakh crore. Hopefully, the damage will be far less than this.