What the RBI Financial Stability Report says about Indian NBFCs

5 Jul 2023 , 05:06 PM

The RBI brings Financial Stability Report (FSR), which his published twice a year in June and in December also highlights progress in NBFCs, apart from banks. Non-banking finance companies (NBFCs) also had a robust March 2023 quarter with overall loan growth across segments standing at 16.1% in the March 2023 quarter. This is sharply higher than the sub-10% growth in the March 2022 quarter and the 10% growth reported in the September 2022 quarter. In comparison, the March 2023 growth in NBFC gross advances was sharply higher led largely by personal consumption loans. Let us look at the inside story of NBFCs in the March 2023 quarter and for FY23 based on the factors captured in the RBI FSR.

Charting loan growth of NBFCs in the March 2023 quarter

As stated earlier, the loan growth for NBFCs overall stood at 16.1%. But what were the components that drove the loan book sharply higher? Massive growth of 31.3% was in the personal consumption loan books. For NBFCs overall, the personal consumption loan book constitutes about 31.2% of the overall NBFC book. The agriculture lending book grew at 13.4% in the March 2023 quarter. For NBFCs overall, the agriculture lending book constitutes just about 1.7% of the overall NBFC book and hence the growth was on a fairly small base. Let us turn to the largest part of the NBFC book, which is lending to industrials. This lending book saw growth of 12.7% for the March 2023 quarter. 

For NBFCs overall, the industrial lending book constitutes the largest chunk of 36.8% of the overall NBFC book. Finally, lending to services in the March 2023 quarter for NBFCs grew by 9.7%, which is sharply lower than the previous quarters. The services lending book constitutes 14.2% of the NBFC loan book. Overall, the industrial lending book of NBFCs and the personal consumption loan book saw better growth in the March 2023 quarter while agriculture and services saw growth tapering in the March 2023 quarter compared to previous quarters.

How does the asset quality of NBFCs look like in March 2023 quarter

Asset quality of NBFCs have improved sharply in the last one year with the overall gross NPAs of the NBFC sector falling from 6% in March 2022 to about 4.3% in March 2023. The gross NPAs have fallen across all category of loans in the quarter with the fall in gross NPAs being sharpest in case of industrial loans and services sector loans while the fall has been moderate in the case of agricultural loans and personal consumption loans. In terms of absolute gross NPAs as percentage of loans, the services sector has the highest gross NPA ratio of 7.8% followed by agriculture at 5.6% and industrials at 4.9%. The personal consumption loans have the lowest gross NPAs at 4.1%. 

However, if you look at the share of gross NPAs, then industrials account for 41.4% of the gross NPAs and this is more due to historical reasons, where a lot of legacy bad assets have been carried forward over the last few years. Personal consumption loan  account for 29.3% of the total gross NPAs while the services sector NPAs account for 25.9%. The agricultural NPAs are much smaller at just about 2.2% of the overall NBFC loan book. Interesting, the public sector NBFCs account for 44% of the total NBFC loan book while private NBFCs account for 56% of the loan book. However, the good news is that the NPAs have been substantially provided for and that is evident from the very low net NPA ratio of just about 1.3%. The provision coverage ratio (PCR) for the NBFCs overall stands at 70.4% as of March 2023 compared to a level of 55% in the year ago period. Overall, the asset quality situation of NBFCs have also substantially improved in the last on year.

Capital adequacy position of NBFCs as of March 2023

During the March 2023 quarter, the NBFCs maintained high capital adequacy ratio on the back of robust profits and requisite capital raising done by the NBFCs. Over the last one year, the capital adequacy has been stable around 27.5%, which his well above the statutory minimum requirement of 15%. That leaves the NBFCs with a lot of room to growth their asset books from the current levels. Over the last one year, the return on assets for NBFCs as a whole has grown from 2% to 3.3%. One very good indicator of capital health is the ratio of equity and debt in the overall balance sheet of the NBFC. 

Between March 2020 and March 2023, the share of borrowings in the balance sheet has fallen from 66.4% to 62.3% while the share of equities has risen from 24.2% to 28.5%. Within the borrowing basket, the share of bank borrowings has gone up from 23.2% in March 2020 to 25.2% in March 2023. Even the stress tests on capita and liquidity show that NBFCs are well positioned to handle any shocks in the next one year, irrespective of intensity. The impact on the capital adequacy and the gross NPAs even in an extreme stress condition is unlikely to be anything disconcerting.

Quick look at the Insurance sector and Mutual Funds

While the insurers and mutual funds are not strictly lending NBFCs, they do form an important part of the financial system in terms of their AUM and the risk metrics. Let us focus on insurance first. In terms of solvency ratio for life insurance companies, LIC has consistently held the solvency ratio in the range of 180% to 190% while private life insurers overall have maintained solvency ratio above 220%. The threshold prescribed by IRDA is 150%, so both are above the mark, although the position is a lot more comfortable in the case of the private life insurance companies. However, in the case of the non-life insurance companies, the situation is slightly different. Here, private non-life insurers have comfortable solvency ratio of above 220% while it is sub-optimal (under 100) for the PSU insurance companies in India.

What does the FSR say about mutual funds in India? In terms of the AMCs that underwent stress test, 29 AMCs showed no signs of stress while 14 AMCs showed some signs of stress. Stress test normally refers to the debt fund schemes. In terms of schemes, 271 out of 295 schemes reported no stress while the 24 companies that reported stress accounted for 10% of the debt fund AUM. That remains a concern for the mutual funds on the debt funds side.

Overall, the situation appears to be under control as far as banks are concerned as also the NBFCs. However, PSU general insurance companies have exhibited some stress in terms of solvency while debt funds are still reporting fairly high levels of stress in select categories.