The NBFC Prescription

Why they need to focus on a more robust asset-liability management framework and diversify their borrowing mix.

- Ajay Srinivasan

Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) have grown strongly, especially in the last three to four years. The share of NBFCs and HFCs in the total credit system has been steadily rising—from 15.2 percent in FY14-15 to 19.2 percent in FY18. This growth was partly due to the slowdown in lending by banks, particularly public sector banks (PSBs), and partly due to the model of these entities, built on quicker response times and last-mile connectivity.

With 11 PSBs under the Reserve Bank of India’s (RBI) Prompt Corrective Action (PCA), there has been some pressure on the supply of credit. The overall credit growth of banks under PCA was negative for the three financial years up to FY17-18. Some amount of the credit demand in the economy, therefore, got channelled to NBFCs and HFCs, leading to the increase in their share in overall credit.

Interest rates have been falling from 2014 till late-2017. Mutual funds (MFs) are an attractive option for investors in such a scenario. Hence, assets under management (AUM) for MFs witnessed a significant growth, rising by about 75 percent between March 2016 and March 2018, and adding more than 9 lakh crore. A significant part of this came in the year after demonetisation. Commercial papers (CP, short-term borrowings of up to 90 days) issued by NBFCs to MFs increased from about 50,000 crore in March 2016 to 1.2 lakh crore in September 2018.