Given the level of performance over the past one and a half years, it can be easily forecast that the non-banking financial companies (NBFCs) will continue to follow a downward trend. Further, the second half of the current year will also remain affected due the Government’s demonetisation move and, therefore, one can easily expect the decline to be sharp at the end of the FY16-17.
During the past few years, the NBFC sector has constantly been in the news, which was mainly due to the promise that the sector has shown to stakeholders, both domestic and international. Over the years, the sector has gained a lot of importance and confidence among regulators, which has urged them to streamline the regulatory directives for the NBFCs. There have been multiple attempts to do that. However, despite the fact the sector received sufficient attention, it has failed to live up to its potential. At least, that is what the recently published Financial Stability Report, December, 2016
and the Report of Trend and Progress of Banking in India, 2015-16
have to say.
In this article, we intend to analyse the performance of the Indian NBFC sector on the basis of these two reports.
Size of the NBFC Sector
The reports suggest that the number of the NBFCs has been falling over the past few years. The cautious approach of the RBI in handling NBFCs and also its intention to consolidate the NBFC segment can be attributed to this decline. As seen in Figure 1, the number of NBFCs fell from 11,842 at the end of FY14-15 to 11,682 at the end of FY15-16 and 11,555 at the end of the first half of FY16-17.
Performance of the NBFC Sector
The industry has reported decreasing growth. The reports state the overall balance sheet size of all the NBFCs grew 15.5% during FY15-16 and 8.5% during the first half of FY16-17.
Further, the sector reported 10.5% growth in loans and advances at the end of September 2016 as against 16.6% at the end of March 2016. However, during the last one and half years it also reported a rate of gross non-performing assets (GNPA) that is in line with the normal trend. During the first half of FY16-17, the NBFCs reported GNPA of 4.9% which was 4.6% at the end of FY15-16. Figure 2 shows the trend in GNPA and NNPA reported by NBFCs during the past four years as compared to the growth in loans and advances.
It is the assumed that the deterioration in the asset quality is mainly due to the inter-connectedness of the NBFC sector with the banking sector and the poor performance of the banking sector in terms of asset quality. As per the Financial Stability Report, the GNPA of the banking sector was 9.1% at the end of the first half of FY16-17, expected to go up to 9.8% at the end of FY16-17 and to 10.1% at the end of FY17-18.
One of the major causes of the poor overall performance of the banking sector is the weak performance by public sector banks which reported GNPAs of 11.8% of the total advances at the end of the first half of FY16-17. This is expected to rise to 12.5% by the end of FY16-17 and 12.9% by the end of FY17-18.
In terms of capital adequacy, the sector has not been able to perform well during the past one and a half years. The performance has been deteriorating in comparison to the existing trend. The overall capital adequacy stood at 23.1% at the end of first half of FY16-17 and 24.3% at the end of FY15-16. Figure 3 shows the trend in overall CRAR of NBFCs in India during the past few years.
Though the overall capital adequacy of the NBFCs were much above the regulatory requirement of 15%, given the downward trend and the rising level of NPAs, it is certainly a matter of concern for the industry.