Non-banking finance companies (NBFCs) are quickly filling the space left by banks in corporate credit, and their pace of wholesale loan growth annually could be as high as 21 per cent, in the next two years.
Saddled with bad debts, banks are cutting on lending to the corporate sector but NBFCs are lending aggressively to real estate, infrastructure finance, and structured credit space, said CRISIL Ratings in a report. The three, termed ‘wholesale credit’ is seen “growing at a pacy 21 per cent annually till 2020, or 350-400 basis points (bps) faster than the individual and MSME (micro, small and medium enterprises) segments. Consequently, its share of non-banks’ overall credit pie would surge to 20 per cent from just 12 per cent in 2014,” CRISIL said.
CRISIL could not give the share of NBFCs in the wholesale credit segment, vis-à-vis banks, but the Reserve Bank of India (RBI) in October last year had said NBFCs were slowly increasing their share in commercial lending space.
NBFCs have increased their market share in credit to business from 2 per cent in 2015-16 to 2.8 per cent in 2016-17, said the RBI study.
NBFCs disbursed Rs 840 billion of commercial loans in 2015-16 but the segment rose sharply to Rs 1.24 trillion in 2016-17, growing the book by 8.8 per cent. CRISIL said stable asset quality in the segment had been achieved because of stringent controls. “The security structure is robust, with a high degree of operational control over escrow cash flows, specifically in real estate exposures. The collateral cover in structured loans tends to be high,” said Krishnan Sitaraman, senior director, CRISIL Ratings.
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, CRISIL said.
Non-banks have stepped in to fill the vacuum left by banks, “aggregating exposure across projects in different stages of completion,” CRISIL said. The infrastructure financing space, which accounts for roughly a quarter of the wholesale credit portfolio of non-banks should benefit from government spending in sectors such as roads which offers nearly Rs 1 trillion in business opportunity in the medium term, CRISIL said.
Specialised lenders such as infrastructure debt funds set up through the NBFC route are also well-positioned to capitalise on this.
However, NBFCs are facing some asset quality issue in the renewables sector. Besides, the wholesale credit segment possess challenges in the form of concentration risk, with the top 10 accounts of a typical non-bank operating in this space comprising 25-30 per cent of its advances.
But because of stringent loan monitoring, and quick corrective actions taken, the loans remain healthy.
“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 five-seven years, financiers have managed exits in just three-three and a half years.”
The gross non-performing assets in the wholesale segment were at about 2.5 per cent as of March 31, significantly better than that for the banking sector, CRISIL said.