NBFCs' share of retail loans at a 10-year high

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Retail non-banking finance companies (NBFCs) are on a roll. Their share of total retail lending in India reached an all-time high of 36 per cent at the end of March this year and they continue to grow faster than both public and private sector banks (See adjoining chart).

Advances by retail NBFCs were up 17 per cent last fiscal year over the previous year, against 15 per cent growth reported by private sector banks and 2.5 per cent decline in the loan book of public sector banks (PSBs).

Retail NBFCs such as Housing Development Finance Corporation (HDFC), LIC Housing, Indiabulls Housing, and Bajaj Finance now account for 11 per cent of the country’s combined bank and non-bank credit. In FY11, their share had touched a 10-year low of just 6.8 per cent.

In value terms, retail NBFCs were the second-biggest source of funding for all borrowers, which includes retail and corporate, coming after private sector banks and ahead of PSBs in 2016-17. NBFCs disbursed Rs 1.31 lakh crore worth of loans in FY17, while the  loan book of listed PSBs declined by Rs 1.35 lakh crore. Private sector banks were at the top with fresh loan disbursals of Rs 2.72-lakh crore last fiscal year. 

The analysis is based on advances by listed retail NBFCs that are part of the BSE 500, BSE MidCap and BSE SmallCap index. The data for banks are for listed PSBs and private sector banks. Banks’ numbers have been adjusted for mergers and acquisitions in the last 10 years. The NBFCs in the sample include HDFC, LIC Housing Finance, GIC Housing, Dewan Housing Finance, Indiabulls Housing, Bajaj Finance, L&T Finance, Edelweiss Finance, Shriram Transport Finance, Bharat Financial, and Manappuram Finance. Experts attribute the rise of NBFCs to a decline in competition from PSBs and availability of cheap capital, which they could lend to their customers. 

“Most of the PSBs have largely withdrawn from the lending market as they are focusing on resolving bad loan problems. This has opened up new growth avenues for NBFCs and private sector banks in fast-growing segments such as auto and home finance,” says G Chokkalingam, founder and managing director, Equinomics Research & Advisory. 

The growth was aided by a steady reduction in the cost of funds for NBFCs due to a general decline in interest rates after the highs of 2013. The average borrowing cost for NBFCs in the sample declined to 8.9 per cent during FY17, from a high of 10.3 per cent in FY13. Buoyancy in the equity markets and investors’ interest in NBFCs also helped these lenders raise incremental equity, allowing them to scale up their lending.  

“Liquidity has been benign in the last few years, giving NBFCs access to low-cost debt capital. They supplemented it by raising fresh equity, taking advantage of the rally in the stock markets,” says Karthik Srinivasan, senior vice-president, Icra.

In the last three years, the combined net worth or equity capital of NBFCs has grown at a compounded annual growth rate of 19.7 per cent, nearly 200 basis points faster than the growth in their net profits during the period.

NBFCs have also been helped by an increase in households’ propensity to borrow in the country, with a greater number of Indians now resorting to consumer loans for big-ticket purchases such as consumer durables and furniture than in the past. Total retail credit is up nearly 64 per cent in the last three years in India, against 34 per cent rise in personal disposable income during the period.

The growth has also been aided by generally lower bad loans in the retail segment compared to corporate loans. “Most retail lenders have significantly lower non-performing assets than corporate banks. This has given them the confidence to grow without the worries of bad loans,” says Khusroo Panthaky, director, Grant Thornton Advisory.

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