Indian banks would face a capital shortfall of about $50 billion in the event of a systemic crisis in the non-banking financial company (NBFC) sector, as these entities have thin buffers against such stress, says Fitch Ratings.
In a note, the ratings agency says, "Systemic stress across India’s NBFCs would deal a significant setback to the banking sector recovery, reversing recent improvements in performance, pressuring viability ratings (VRs) and posing solvency risks to state-owned banks with the thinnest buffers. Credit profiles of the state banks would come under significant pressure, and the weakest - including those with VRs in the 'B' range - would face heightened solvency risks without capital injections from the government."
Fitch conducted a stress test to examine the potential impact on banks of the NBFC sector pressures developing into a broad crisis. It estimated that the scenario would leave banks with an aggregate shortfall of $10 billion to meet regulatory minimums, and $50 billion below the level that we believe would provide an adequate buffer.
During FY2014 to FY2019, bank lending to NBFCs increased by a compounded annual growth rate (CAGR) of 17%. During the same period, NBFCs also grew rapidly over this period, taking advantage of the market space created by the capital-constrained state-owned banks pulling back on lending to the non-financial sector. Instead, banks preferred to lend to NBFCs as a way to deploy their excess liquidity while also limiting their direct exposure to the corporate and housing sectors.
This resulted in banks’ exposure to NBFCs reaching 7.4% at FY19, up from 5.3% at FYE14. The more extensive linkages between banks and NBFCs have raised contagion risks in the event that the NBFC sector suffers a crisis, Fitch says.
The NBFC sector in India has been under pressure from tight financing conditions since the default of Infrastructure Leasing & Financial Services (IL&FS) in late 2018. The tough market environment is likely to persist, at least in the near term, and will test the resiliency of other NBFCs.
The most vulnerable are likely to be those that operate with higher leverage and weaker asset-and-liability (ALM) maturity profiles that face higher concentration risks. Typically, this includes wholesale and housing finance companies, Fitch says.
NBFCs are an important source of financing for real estate in recent years, with banks pulling back from the sector.
Developers are now facing liquidity pressures as NBFCs have also begun to shy away from the sector, showing reluctance to refinance maturing debt of even large, proven developers. Developers have been curtailing growth, but their lack of funding alternatives still makes them vulnerable to the retrenchment in NBFC lending.
Moreover, demand for property has slowed, especially for high-end projects, which could make it difficult for developers to address liquidity shortages by offloading their inventory of unsold homes.
According to Fitch, large property defaults would result in losses for direct NBFC creditors, and would pose significant contagion risks for the rest of the sector, testing system-wide liquidity.
It says, "NBFCs source 55%-65% of their total funding from debt instruments, with about 10%-13% coming in the form of short-term commercial paper. Much of their lending is long term, especially in the case of wholesale and housing finance companies, resulting in weak liquidity profiles."
"We assume that 30% of the NBFC exposure becomes nonperforming. We view this as close to a worst-case scenario, but the figure also reflects the proportion of the sector that we believe is characterised by riskier business and financial profiles.
We also assume 30% of property exposure becomes non-performing, and that economic knock-on effects lead to an extra 10% of personal, credit card and consumer durable loans and 2.5% of corporate loans becoming non-performing," the ratings agency says.
Fitch estimates banking system’s gross non-performing loans (NPL) ratio to rise to 11.6% by FYE21 from 9.3% at FYE19, compared with its baseline expectation of a decline to 8.2%.
It says, "We would expect the recovery process to become even more protracted in such a difficult environment, although banks would resort to writing off some of the legacy bad loans in order to manage their NPL stock, as has generally been the case so far."
Latter on it become NPA and they still get some percentage money for hiding or delaying in declaring these acount as NPA.
I never found any bank loan sanctioning authority who's personnel property has attached and he is sentenced for whole life prisonment.