“The drag in the profitability of the NBFCs
in FY19 is driven by non-deposit taking systemically important NBFCs
as their operating expenditures and interest payments grew significantly, reflected in their higher cost-to-income ratio", said the RBI in its report. Net profit as a per cent of total assets of NBFCs was 0.8 per cent in H1FY20 and 1.5 per cent in FY19. The deposit taking ones profit grew robustly in FY19, on the back of fund-based income, with substantial decrease in operating expenditure.
The RBI has consistently maintained that it is closely monitoring the top 50 NBFCs which are systemically important for the stability of the financial sector and it will not hesitate to act, wherever necessary, to ensure that any large or systemically important NBFC does not collapse.
The RBI on its part is monitoring the NBFCs by the existing four pillars of supervision which are on-site examination, off-site surveillance, market intelligence and reports received from statutory auditors. Furthermore, to keep a vigil on the stability of the NBFCs, the RBI is institutionalising a periodic interaction with the stake holders of the shadow banking
sector like statutory auditors, credit rating agencies, and banks
that have large exposures to NBFCs as a part of the supervisory process for monitoring the incipient build-up of risks so as to be able to take pre-emptive actions, the report said.
Additionally the RBI is keeping a close watch on the non-traditional and digital players in the shadow banking
space to ensure timely mitigation of risks to financial stability.
Post the IL&FS crisis, as investor confidence in the NBFC sector took a hit and raising funds via debentures became costly, the NBFCs increased their reliance on bank borrowings. According to the report, at the end of March 2019, bank borrowings in NBFCs liabilities profile constituted 27.2 per cent compared to 21.7 per cent in FY18 while debenture borrowings came down to 43.8 per cent in FY19 from 50.4 per cent in FY18.
The share of commercial papers (CPs) declined marginally in the liability portfolio of shadow banks
and CP issuances also decelerated in FY19.
“This happened even as the 3-month CP rates of NBFCs have been declining in the post IL&FS period barring occasional spikes. In spite of the low borrowing costs, the attractiveness of CPs as a source of borrowing for NBFCs diminished, owing to NBFCs preference for term-borrowings for better asset-liability management,” the report said.
As far as housing finance
companies (HFCs) are concerned, although their balance sheet grew, albeit at a slower pace, income and expenditure of HFCs
grew at a faster rate in FY19 than a year ago leading to a decline in net profit. Net profit of HFCs
decelerated at 17.5 per cent in FY19 compared to a 24.4 per cent growth in FY18. The asset quality of the HFCs
has remained stable with GNPAs at 1.3 per cent in FY19, however, the NNPAs have crept up to 0.8 per cent reflecting decrease in provisions maintained by the HFCs.
Nuts ‘N’ Bolts
Asset quality of banks improved but stressed emerged from NBFCs. Going forward, resolution of stressed assets, weak corporate governance, and frauds need to be addressed to reaffirm a robust financial sector
Asset quality of small finance banks improved significantly, total income also grew; however, net profit was negative due to one SFB’s exceptionally high losses
Although deposits of payments bank doubled, they reported negative profits of Rs 626.8 cr on account of higher operating expenses
UPI transactions took over from e-wallets as the most prominent channel for inward and outward remittances in terms of both value and volume
The number of branches operated by foreign banks in India rose, contrary to the trend, on account of opening of additional branches by DBS Bank after conversion from branch to a wholly-owned subsidiary
NBFCs may regain niche in the financial system and expand the reach of the credit market to include all productive agents of the economy, once the current liquidity strains recede
Sectoral credit delivery to agriculture by NBFCs witnessed significant rise in FY19