Analysis of the difference in performance among various NBFCs in recent times

Abstract

Over the years, non-banking financial companies(NBFCs) have played a vital role in the development of the Indian economy by providing a stimulus to wealth creation, bank credit, employment generation, and mobilisation of funds throughout the country especially in the rural segments thereby, supporting the weaker sections of the society. NBFCs are financial institutions engaged in the business of accepting deposits (not checkable deposits) and delivering last mile credit leading to channelization of the scarce financial resources for capital formation. NBFCs are considered as shadow banks and are required to adhere to the similar rules and regulations as applicable for banks in India. As of March 2020, the asset under management (AUM) of the total non-banks industry is estimated to be around INR 35 trillion comprising of both retail segment (approx. INR 20 trillion) and wholesale segment (approx. INR 15 trillion). Retail segment includes asset classes like personal credit, auto financing, gold financing, microfinance, loan against property(LAP) & SMEs financing whereas, wholesale financing includes infrastructure financing, real estate loans, corporate loans as well as capital market lending. Also, housing finance companies (both Retail and Wholesale HFCs) account for almost 32% of the total AUM of NBFCs. NBFCs source about 50% of their funds from scheduled commercial banks followed by asset management companies – mutual funds (AMC-MFs) and insurance companies. They are also the largest net borrowers of funds from the financial system, with gross payables and receivables of about INR 8.84 trillion and INR 0.89 trillion respectively as of March 2020. Incidentally, banks and market borrowings account for over 70% of total external liabilities for NBFCs. In the aftermath of various crisis including IL&FS (Sep‘18) and DHFL (Jun’19), non-banks have been facing differentiation in market access and financial conditions with only the higher rated entities able to raise funds. Mid-sized and small-sized NBFCs are been shunned by both banks and markets thereby leading to an unprecedented tension in the entire sector. Consequently, owing to the waning market confidence, the share of market funding (long-term debt) for NBFCs has been constantly declining over the last few years. The contribution of non-converting debentures (NCDs) in the funding mix of NBFCs reduced drastically to 40.8% in Dec’19 from 49.1% in March’17. This funding gap was met through bank borrowings which again is a big concern as it has the potential to accentuate liquidity risk not just for NBFCs but also for the entire financial system. As a result, most NBFCs have focussed on stabilizing their balance sheet by maintaining liquidity and reducing leverage rather than aggressively growing their AUM even though it has been much costlier ultimately leading to a sharp decline in their profitability. Additionally, the performance of the retail and wholesale NBFCs have been quite different in the last few years. The wholesale non-banks segment has been perceived to be much riskier mainly due to huge ticket loans and high concentration in the wholesale borrowing market. This led to a muted credit growth especially when compared to the retail credit growth. Also, delay in regulatory approvals and landsite handover have led to a stalled market for infrastructure financing which is a major component of wholesale NBFCs. The financial analysis of two major NBFCs – Bajaj Finance Ltd. (BAF) and L&T Finance Holdings (LTFH) have supported the argument that retail NBFCs have performed much better than the wholesale segment in the last few years. The superior performance of BAF could be attributed to its retail product diversification (mortgages, SMEs, auto financing), increasing geographical penetration, product innovation and focus on cross selling. On the other hand, LTFH has been constantly facing asset quality issues mainly due to higher exposure to the wholesale segment. As a result, LTFH has considerably reduced their wholesale exposure which stood at 39.5% in FY20 (down from 61.8% in FY15). The company has diversified their exposure in the retail segment (rural finance and housing finance) which has been the major driving force behind itssuperior financial performance in terms of higher profitability and better asset quality in the recent few years.