Other Sectors

Non-bank growth to hit a decadal low of 6-8% this fiscal

Those backed by strong parents less impacted; wholesale lenders most challenged



The trifecta of constrained funding access with rising borrowing costs, re-calibration and de-risking of loan book and a slowing economy is set to beat down growth in assets under management (AUM) of non-banks – comprising non-banking finance companies and housing finance companies – to a decadal low of 6-8% this fiscal, compared with ~15% last fiscal.


Confidence deficit of investors which was initially focused on asset-liability maturity (ALM) profile has firmly shifted to concerns over asset quality – especially for the wholesale book. With the headwinds unlikely to dissipate soon, non-banks – specifically the wholesale-focused ones without strong parentage – would need to make structural changes and reorient their business models, leading to a recalibration of their AUM mix.


Challenges continue on the liabilities side 15 months since liquidity problems surfaced, though steps by the government and regulators to support and structurally strengthen the sector have provided some relief. Overall borrowings raised between July and September 2019 were the lowest in the last four quarters since September 2018. Incremental cost of borrowings has also increased despite the interest-rate cycle turning south.


However, there is a clear differentiation between non-banks backed by strong parentage1 and those without it.


According to Gurpreet Chhatwal, President – CRISIL Ratings, “Non-banks with strong parentage - that account for ~70% of the sectoral AUM - have been less impacted on the funding front. They are likely to drive sectoral growth over the medium term.”


For standalone non-banks, the investor comfort with asset classes they operate in will dictate their access to funds at competitive rates, growth outlook and the extent of reorientation of business models. The retail-oriented non-banks are faring relatively better and funding challenges are abating here. However, wholesale-oriented ones– primarily, real estate developer financing and structured credit – remain affected more in terms of access to funds.


In terms of asset quality, delinquencies are expected to inch up, albeit marginally, for retail asset classes such as home loans and vehicle finance, which together account for more than half of the overall sectoral AUM. The economic slowdown has contributed to a cyclical uptick in delinquencies across retail segments.


In the real estate and structured credit space, delinquencies are likely to increase sharply; the real estate sector is experiencing significant headwinds while the financial flexibility of many underlying operating companies in the structured debt space has been impacted due to the overall slowdown in their business. This is likely to be accentuated further by the fact that major chunk of the loan books is under moratorium. As the moratoria lapse, slippages will manifest.


We believe non-banks are adapting to the changing environment and a business model reset is in order. These include:


  • embracing funding-light models such as co-lending or originate-to-sell which will support retail standalone non-banks and also aid their profitability
  • funding for wholesale asset classes moving to alternative investment funds or AIF structure, which can attract long-term stable resources to suit the underlying customised repayment requirements of borrowers. They may also move to a fee-based income model for managing the exposures instead of on-balance sheet lending. Their AUM is, therefore, expected to contract over the medium term
  • recalibrating and de-risking of loan book – especially for the large non-banks backed by strong parents – with reduction in wholesale exposures and tightening of retail underwriting scorecards

As the transition plays out, AUM growth is likely to recover, though at an estimated 8-10% per annum between fiscals 2020 and 2022. That would still be lower than in the past.


According to Krishnan Sitaraman, Senior Director – CRISIL Ratings, “Going forward rising delinquencies will be a key monitorable for NBFCs in the light of economic slowdown. Questions are also being raised over ability of non-banks to fund balance sheets beyond a certain size purely through wholesale liabilities. In the recent past, we have seen some non-banks merge with Banks. The Reserve Bank of India also recently released guidelines for on-tap licensing of small finance banks. And this could be an option that non-banks could seriously explore to sustainably mobilise retail liabilities.”


1 Non-banks that are backed by strong corporate groups / parents or having a bank in the group.