The wholesale credit book of non-banks – comprising real estate lending, infrastructure finance and structured credit – is seen growing at a pacy 21% annually till 2020, or 350-400 basis points (bps) faster than the retail and MSME (micro, small and medium enterprises) segments. Consequently, its share of non-banks’ overall credit pie would surge to ~20% from just 12% in 2014.
Non-banks include non-banking finance companies (NBFCs) and housing finance companies, but excludes government-owned non-banks.
Asset quality in the segment has been largely stable because of robust controls, and despite an increase in infrastructure loan delinquencies.
Growth in real estate financing, which constitutes a tad over half of the wholesale credit book, would be driven by pent-up demand in affordable housing and rising ticket sizes stemming from funding consolidation. As banks remain cautious in this space, non-banks have stepped in, aggregating exposure across projects in different stages of completion.
On the other hand, infrastructure financing, which accounts for roughly a quarter of the wholesale credit portfolio of non-banks, should benefit from government spending. The roads sector offers a huge opportunity worth over Rs 1 lakh crore in the medium term – not counting the Bharatmala projects, that is. While banks do have a rate advantage, specialised lenders such as infrastructure debt funds set up through the NBFC route are also well-positioned to capitalise on this.
But renewables, a growth engine for NBFCs in the past few years, is seeing asset quality challenges, so lenders will need to exercise caution.
In structured credit, mid-corporate promoter financing is expected to grow strongly, while priority debt in distressed assets will become a potential opportunity as resolution processes under the Insolvency and Bankruptcy Code stabilise and lead to better protection for lenders / investors.
To be sure, the wholesale credit segment has challenges, too – primarily, due to high concentration risk with the top 10 accounts of a typical non-bank operating in this space comprising 25-30% of its advances – which can cause volatility in asset quality.
“But most non-banks have managed risks better, backed by stringent controls,” said Krishnan Sitaraman, Senior Director, CRISIL Ratings. “The security structure is robust, with high degree of operational control over escrow cash flows, specifically in real estate exposures. The collateral cover in structured loans tends to be high at almost 2.5 times on average.”
Loans are monitored continuously against expected performance at the time of sanctioning and corrective action is promptly taken if required. In real estate, lenders proactively exit loans through refinancing once projects reach self-sufficiency. CRISIL’s analysis reveals that while the average tenure of these loans is around 5-7 years, financiers have managed exits in just 3-3.5 years.
Gross NPAs (GNPAs) in the wholesale segment stand at ~2.5% as on March 31, 2018, significantly better than that for the banking sector. In structured credit and real estate, asset quality has been resilient with NPAs below 1%. The Real Estate (Regulation and Development) Act, 2016, is also expected to structurally lower the potential risks in real estate lending post an initial adjustment period.
While GNPA for infrastructure financiers has been increasing over the past couple of years amid stress in the underlying segment – and is estimated at ~5% as on March 31, 2018 – it remains significantly lower than that for banks. That’s because the composition of non-banks’ infrastructure finance portfolio is very different to that of banks. For example, the share of thermal power, the segment that caused most of the NPAs for banks, has been declining and is less than 20% for non-banks.
Said Ajit Velonie, Director, CRISIL Ratings, “Given the high net interest margins and low credit costs in real estate and structured loans, this segment has among the highest profitability metrics for non-banks. Lenders earn a return on assets of 3-3.5% on average. It is lower for infrastructure financiers at around 1.5%, but that’s still adequate.”
However, it is important to note that these segments, especially real estate financing, are relatively unseasoned and have scaled up rapidly only over the past couple of years. While the strong collateral cover may limit ultimate losses, this needs to be tested through business cycles.