NBFC AUMs De-growth 1st Time in 20 years

Assets under management (AUM) of non-banking financial companies (NBFCs) are expected to de-grow 1-3% in the current fiscal as fresh disbursements drop sharply. Disbursements would halve but moratorium, capitalisation of interest to limit AUM de-growth, while incremental funding remains the key monitorable for NBFCs, says ratings agency CRISIL. In a note, it says, "Excluding the top five NBFCs, the degrowth is expected to be even sharper at 7-9%. Lower repayments during the loan moratorium period (March to 31 August 2020), and capitalisation of interest accumulated will, however, help limit the de-growth." As for disbursements, CRISIL says, there are four factors at play. One, the challenging macroeconomic environment, which would curb underlying asset sales, especially in the two biggest segments of housing and vehicle finance; two, sharper focus on liquidity as incremental funding is not easy to come by for many players in a confidence-sensitive scenario; three, stiff competition from banks as funding costs for many NBFCs remain relatively high; and, four, tightening of underwriting standards by NBFCs amid weak economic activity and expectations of increasing delinquencies. 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 (MSMEs), 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," the ratings agency added. Despite intensifying competition from banks, CRISIL says, 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.