While each segment will show its own characteristics, the moratorium will support all. For example, the rundown in home loans is expected to be lower because of longer tenure and 20-30% of the book being under moratorium. That, along with some incremental disbursements in the latter half of this fiscal, and capitalisation of interest accumulated would support AUM levels. For wholesale finance, ~40% of the book is seen under moratorium in a business-as-usual scenario (with the addition of the Covid-19-related moratorium, 80-90% of the total book is estimated to be under moratorium).

In the current environment, competition from banks, especially in the traditional asset classes such as home loans and vehicle finance, is expected to be substantially higher given that banks have surplus liquidity and their focus will be on these asset classes in the retail space. But in real estate and structured finance, NBFCs have been catering to borrowers at the project stage, where banks do not have a major presence. As for micro, small and medium enterprises, especially loan against property, and the unsecured segments, even banks are expected to be cautious. As a result, NBFCs could still find a footing in the second half of the current fiscal.

Despite intensifying competition from banks, NBFCs are expected to tighten their underwriting standards because of worries over asset quality deterioration. Such circumspection may limit disbursements to real estate, structured finance, MSME finance, and unsecured loans.

But access to incremental funding will be the bigger challenge, as reflected in corporate bond and commercial paper issuances of NBFCs over the past 20 months or so. Redemption issues and risk aversion at mutual funds (a key investor in this segment) are compounding the woes. Securitisation, too, has seen very few transactions after the onset of the Covid-19 pandemic because of asset-quality fears and lack of granular data on collection efficiency.

Says Ajit Velonie, Director, CRISIL Ratings, “Despite the decline in interest rates over the past six months, the funding cost for NBFCs has remained relatively high because of risk aversion among investors and lenders. On the other hand, public sector banks and leading private banks have surplus liquidity, marked by improving low-cost funding such as current and savings account deposits. With banks sharpening focus on retail loan products, NBFCs are expected to lose share, especially in the housing and vehicle finance segments.”

Some green shoots were visible in June when NBFC fund-raising from banks improved because of the long-term repo operations (LTRO) window opened by the Reserve Bank of India. However, LTRO is a one-time facility so the pace of fund raising via traditional routes bears watching.

NBFCs with strong parentage or those that are part of large corporate groups (accounting for ~70% of sectoral AUM) should continue to fare relatively better on the fund-raising and disbursement fronts. Further, NBFCs have navigated extended stress periods in the past and that experience, along with their core strengths of customer relationships, adaptability, local knowledge, innovation and responsiveness will be supportive as they attempt to tide over the current challenges.

¹ NBFCs include housing finance companies but exclude government-owned NBFCs