RBI report says NBFCs improving on performance metrics

Mumbai: Even as the banking sector reels under an unprecedented pile of bad loans that has restricted the ability of a number of banks to grow, non-banking finance companies (NBFC) have reported an improvement in most of their performance metrics.

A Financial Stability Report (FSR) released by the Reserve Bank of India (RBI) on Tuesday noted that loan growth of the NBFC sector was at 16.6% for fiscal 2016, nearly double compared with the 8.8% growth in credit seen across the banking sector on an aggregate level. The aggregate balance sheet of the NBFC sector expanded by 15.5% for fiscal 2016 compared with 15.7% the previous year, the report said.

NBFCs also performed better in terms of asset quality, even though the bad loan norms for these firms are not as stringent as those for banks.

The gross non-performing assets (GNPA) ratio for the NBFC sector declined to 4.6% of the total advances in March 2016 from 5.1% in September 2015, according to the FSR.

“While the regulatory norms for the NBFC sector are sought to be brought closer to those applicable to banks, the performance of this sector (return on equity and return on assets) seems to be much better as compared to that of banks,” the report said.

In November 2014, the RBI revised the regulatory rules for NBFCs and said that prudential norms would be brought on par with banks over a period of time. As a result, bad loan recognition rules were tightened and NBFCs were asked to label all loans where repayment is overdue beyond 90 days as bad by 2018 in stages.

The RBI’s study covers the 11,682 NBFCs that were operating as of March 2016.

Capital adequacy levels of the NBFC segment have also improved, unlike banks where erosion of capital was witnessed. The capital adequacy ratio for the NBFCs as a whole improved to 24.3% as of March 2016 from 23.85% in September 2015.

Stress tests for the sector showed that even under extreme stress, the capital of the NBFCs may erode only marginally. However, not all NBFCs have the same level of health. Stress tests on individual NBFCs showed that 5% of the total 11,682 companies would be unable to comply with minimum regulatory capital requirement of 15%.

In contrast, stress tests for banks showed that under severe shock, 20 banks that have a share of 38.4% of total credit would fail to meet minimum regulatory level for capital.

The relative strength of NBFCs has allowed them to garner more business as banks focus on resolving their bad loan issue and strengthening their books. Many NBFCs are expanding beyond their traditional lending business to offering even working capital loans of corporates, Mint reported on 10 May.