Financial Landscape of the NBFC Sector Madan Sabnavis Chief Economist madan.sabnavis@careratings.com 91226754 3638 Sushant Hede Associate Economist sushant.hede@careratings.com 91226754 3408 Guided By: Revati Kasture Senior Director Mradul Mishra (Media Contact) mradul.mishra@careratings.com +91226754 3515 Disclaimer: This report is prepared by CARE Ratings Ltd. CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE Ratings has no financial liability whatsoever to the user of this report. November 28, 2018 I Economics The important role played by the nonbanking finance companies (NBFCs) in the Indian financial system has complemented the banking system and bought about enhanced coherence and diversity in financial intermediation. NBFCS have progressed considerably in terms of operations, heterogeneity, asset quality, regulatory architecture and profitability. NBFCs disbursing credit to the overall commercial sector has increased and gained importance in the preceding few years as banks have faced challenges in lending amid the nonperforming assets (NPAs) overhang. The Financial Stability Board, an international organisation monitoring and making recommendations on the global financial system has deemed lending by NBFCs as shadow banking globally. These specialised intermediaries enjoy the benefit of lower transaction costs, financial innovations and regulatory arbitrage. NBFCS play a critical role in emerging market economies by undertaking the following activities: Reaching out with their services to inaccessible areas They are substitutes to banks when the banks face strict regulatory constraints Convenience in transactions on the back of quicker decision making ability, prompt provision and expertise in niche segments However, of late the NBFC sector has encountered challenging liquidity conditions. The sector is facing a credit crunch and liquidity concerns which has had a contagion effect on other sectors dependent on NBFCs for funding their growth. In addition, the Global Financial Stability Report released by the International Monetary Fund (IMF) has apprised systematic risks associated with shadow banking practises which might spill over to the banking system. Given this backdrop, the foregoing study analyses the performance of the companies in the NBFC sector across three broad categories: Source of Financing Loans granted under financing activity Profitability indicators In addition, for better presentation, the NBFC sector has been classified into three broad segments and the corresponding number of companies analysed has been given in parenthesis: Housing Finance Companies: HFCs {18} Financial Services/ Investment companies: FSI{173} Term Lending Companies : TLs {5} The data has been compiled from the database of ACE Equity based on standalone financials of the companies and the relevant ratios have been computed to understand the developments in the operations of NBFCs.
3.3 2.5 2.7 2.7 3.1 2.8 4.0 3.2 3.7 3.2 4.0 3.9 3.8 4.7 4.5 5.7 6.9 8.2 Sources of Financing This section examines the salient indicators of NBFCs with regard to the borrowings and their key ratios which help to understand the growth in the financing activity. Chart 1 exhibits the total outstanding borrowings (long term borrowings, short term borrowings and current maturity of long term borrowings) of the sample NBFCs under study. The total outstanding borrowings of all three categories are Rs. 16.5 lakh crs in FY18 having increased from Rs. 8.5 lakh crs in FY13. Chart 1: Total outstanding borrowings (Rs. lakh crs) 9.0 8.0 7.0 6.0 4.0 3.0 2.0 1.0 2013 Financial Year HFC FS/I TL Out of the total borrowings, the highest contribution to the tune of 49.4% is of the Housing Finance Companies (HFC) segment. The reliance on higher borrowings and a CAGR of 19.7% during FY13FY18 is on the back of a commensurate increase in the credit extended by HFCs. The borrowings of HFCs have witnessed a sustained doubledigit growth on an average of % during the previous five years. The share of HFC s borrowings in total borrowing portfolio has increased from 38.8% in FY13 to 49.4% in FY18. Despite the growth in outstanding borrowings in each category, the share of financial services/investment companies (FSI) and term lending institutions (TL) segments borrowings in overall NBFC sector borrowing has witnessed a decline over the years under study compared with the share of HFCs. The share of borrowings for the FSI segment declined from 29.5% in FY13 to a low of 22.9% in FY17, following which it again gained reaching 23.1% in FY18. The share of borrowings for TL segment has witnessed increase during FY13FY16 to scale 31.9% after which it declined by almost 4% in FY17 and subsequently declined in FY18 to stand at 27.3%. The CAGR growth of borrowings in case of FSI and TLs is at 8.6% and 11% respectively during FY13 FY18. Chart 2 shows that dependence of the three categories of nonbanking finance companies on long term and short term borrowings. On an aggregate basis (all categories considered together), the reliance of these companies on long term finance is 85.4% of the total outstanding borrowing, 3% lower than the share achieved in FY13. Across the five years under study, the share of respective nature of borrowings has been relatively stable and hence for better presentation a comparison of only two years has been done. 2
Chart 2: Long term borrowing vs Short term borrowings (%) 1 100.0 80.0 60.0 40.0 9.1 16.7 22.4 24.0 4.2 2.9 90.9 83.3 77.6 76.0 95.8 97.1 2013 2018 2013 2018 2013 2018 HFC FSI TLs LTB STB Note: Long term borrowings include the current maturities of long term borrowings All the three categories under the NBFC sector have higher reliance on long term borrowings visàvis short term borrowings. The reliance on short term funding in case of HFCs has increased over the preceding 6 years which can be juxtaposed with the significant CAGR of 16% in the short term loans disbursed. It is to be noted that an increasing reliance on short term funding, albeit a significant growth in short term loans, needs to be looked at with caution as HFCs primarily have either medium term or long term lending. This could lead to an ALM mismatch. The dependence on short term funding in case of FSI segment has been largely stable at around 1/4 th of the total outstanding borrowing while term lending institutions rely on long term funding having scaled 99.1% in FY17. Chart 3a, 3b and 3c highlights the growth in outstanding borrowings (long term + short term) during FY14FY18 for all the three categories of NBFCs taken together and juxtapose that with the outstanding loan growth (extended by NBFCs) during the same period for the sample companies. The demand for higher borrowings for the NBFC sector is linked to the higher fund requirements of the entities borrowing from the NBFC space. This means that a higher credit growth in the NBFC sector (more lending by the NBFC sector) would in turn translate into higher borrowings by the NBFC entities. 3
Growth in outstanding borrowings (%) Growth in credit (%) Growth in outstanding borrowings (%) Growth in credit (%) Growth in outstanding borrowings (%) Growth in credit (%) Chart 3a: Growth in outstanding borrowings (%) and growth in outstanding credit (%) by HFCs 22.0 21.0 18.2 21.2 18.5 17.6 21.74 21.5 2 19.0 18.0 19.61 18.93 19.80 1 18.65 17.0 Borrowing Loan growth Chart 3b: Growth in outstanding borrowings (%) and growth in outstanding credit (%) by NBFCs 20 0 10 0 0 (0) (0) (10) 19.79 15.45 9.39 11.70 24.1 11.5 13.6 6.5 (10.80) 5.4 30.00 20 0 10 0 0 (0) (0) Borrowing Loan growth Chart 3c: Growth in outstanding borrowings (%) and growth in outstanding credit (%) by TLs 20 0 10 0 0 17.9 18.3 19.0 15.4 10.1 8.9 13.8 14.1 0 10 0 0 (0) 0.3 1.0 (0) Borrowing Loan growth 4
Chart 3a, 3b and 3c summarises the fact that a higher credit growth translates into higher growth in borrowings for all 3 categories of the NBFC sector. It is also observed in case of FS/I (Chart 3b) in FY16 and TLs (Chart 3c) in FY17 that a contraction in credit growth translated into contraction in borrowings for the respective years. This was the time post demonetization when lending activity had slowed down in the financial system which was also reflected in growth in bank credit. Chart 4 exhibits the capital gearing ratios of the 3 categories in the NBFC sector during the preceding 5 financial years starting FY14. The capital gearing ratio measures the ratio of total borrowings to total tangible networth (equity + reserves) and indicates the financial leverage or the financial risk of the company.. The degree of risks increases for lenders to NBFCs in case of uncertainty or volatility in earnings. As a high proportion of lending is backed by high borrowings, this ratio remains high for all financial intermediaries like banks and NBFCs. A ratio of total deposits (savings, time and demand deposits) to net worth of all scheduled commercial banks stands at 10 in FY17 (recent available data computed from Report on Trend and Progress of Banking in India).. Chart 4: Capital gearing ratio during FY13FY18 8.0 7.0 6.7 7.1 7.4 7.6 7.5 6.8 6.0 4.0 3.0 2.0 6.0 5.5 5.5 5.7 5.5 5.1 3.0 3.0 3.0 2.6 2.6 2.5 FY13 FY14 FY15 FY16 FY17 FY18 TL FS/I HFC Chart 4 shows that all the three categories within the NBFC space are highly leveraged Despite the decline in the gearing ratio for HFCs in FY18 and sustained moderation in case of FS/I, this ratio stands to be high. Total outstanding borrowings forms a majority of total liabilities for the NBFC sector and this ratio has been calculated for each of the segments in Chart 5. For the overall sample companies, it is observed that the share, after having peaked at 77.7% in FY15 has declined during the previous 3 years to be at 76.3% in FY18. A segmentwise analysis shows that in case of borrowings, there is a higher reliance for the HFCs and TLs, relative to financial services/investment companies. The HFCs and TLs have a ratio of around 80% during the previous 6 years. In contrast, this ratio for the FSI segment has declined over the years from 68.7% in FY13 to 64.3% in FY18. For comparison of NBFCs with bank, it is found that the ratio of total deposit to total liabilities stood at 78.5% in FY17 (latest available data using RBI s report on Trend and Progress of Banking in India).. 5
Chart 5: Total borrowings to Total liabilities (%) 8 80.0 7 70.0 6 60.0 82.1 82.4 82.8 82.8 80.6 81.6 81.2 80.8 80.8 80.2 68.7 68.8 68.7 79.9 78.5 65.4 64.9 64.3 2013 HFC FSI TL A study done by RBI titled Non Banking Finance Companies in India s Financial Landscape shows that bank borrowings have been replaced by marketbased instruments like debentures in recent years. The share of bank borrowings by NBFCs declined from 27.3% in FY13 to 21.6% in FY17 while that of commercial paper and debentures have increased during this period. The share of short term instrument like commercial papers increased from 5.5% in FY13 to 9.7% in FY17 while the share of long term bonds rose from 46% in FY13 to 49.2% in FY17. Another ratio, presented in Chart 6 helps to understand the quantum of short term repayments/ rollover of loans as a size of the total borrowings. This ratio signifies what proportion of the total outstanding borrowings of the NBFCs is of the short term nature and is to be repaid/rollover within the next one year.. As per the accounting standard disclosure norms, the short term borrowings and current repayments of long term borrowings are treated as current liabilities. Given that they are current liabilities, the repayment of these instruments has to be done within the subsequent one year time frame. Chart 6: Short term repayments as a % of total borrowings 50.0 45.5 43.6 43.0 47.4 45.1 43.2 40.0 30.0 35.8 36.3 37.5 37.8 31.8 32.4 14.6 16.1 17.8 11.8 12.7 12.6 2013 HFC FS/I TL On an aggregate basis (taking all companied together), the above ratio was relatively stable at around 30% during FY13 FY15 but witnessed a spike in FY16 and FY18 indicative of the higher repayments/rollover scheduled in the forthcoming 6
Rs. lakh crs credit growth % year. This ratio has been high for the FSI and has been increasing for the HFCs and term lending institutions, reflective of a large quantum of short term repayments/rollover due. Barring a steep decline in FY17, this ratio calculated for the HFCs have witnessed a sustained increase during the time period under study and has peaked at 37.8% in FY18. In case of FSI, this ratio has been falling during FY13FY18 barring a spike in FY16. This ratio stands at 43.2% at the end of FY18. This ratio has been volatile with regards to term lending institutions having fluctuated between 11.8% in FY14 and peak of 18.3% in FY18. Total credit disbursements This section deals with the asset side of the balance sheet focusing on the credit granted by the NBFCs to the varied sectors to fund their requirements. The NBFC sector has traditionally funded both the industrial and the retail segments. The RBI study states that while industry has received about 2/3 rd of the total credit by these companies, there has been a significant jump in the share of retail credit from 3.4% in FY15 to 17.7% in FY17. Chart 7a shows that total credit disbursed by these sample companies under study and the growth in the total credit across the time period. Chart 7b gives the total loans disbursed by the three segments across the given time frame. Chart 7a: Total outstanding credit (Rs. lakh crs) and growth in credit (%) 2 18.0 19.6 16.0 14.0 12.0 14.8 17.6 1 8.0 6.0 4.0 8.8 10.1 11.9 9.6 13.0 10.4 14.4 17.2 2.0 2013 Total credit Growth 7
Chart 7b: Division of the total credit based on different segments (Rs. Lakh crs) 1 5.3 4.6 4.2 4.6 3.9 3.6 3.0 3.1 2.5 2.6 2.9 2.8 3.3 3.9 4.7 5.6 6.6 8.0 2013 HFC FSI TL Chart 8 juxtaposes the bank credit growth and NBFC credit growth for the preceding 5 years to analyse the performance of the NBFC sector visvis Banking sector. Chart 8: Bank credit growth vs NBFC credit growth (yoy % change) 25 20 15 10 14 14.8 9.1 17.7 10.9 9.7 8.2 10.5 10 19.6 5 0 Bank credit NBFC credit, CMIE The above charts show the sustained credit offtake in total NBFC sector credit during the previous 5 years. The total credit disbursed by the sample has been Rs. 17.2 lakh crs. This quantum of credit extended by the sample companies in the overall NBFC sector is around 20% of the bank credit of Rs. 86.3 lakh crs in FY18 and has increased from 16.7% in FY13. The NBFC sector has witnessed a significant credit uptick of 19.6% in FY18 over a growth of 10.5% in FY17. The growth in FY18 has been significantly higher than the bank credit growth of 10% in FY18. The NBFC credit growth at double the rate than the bank credit growth is attributed to the banking system witnessing 8
challenges such as adherence to capital adequacy norms, NPA, banks under the prompt correction action (PCA) and lower demand from manufacturing in particular. Out of the last 5 years, NBFC credit has been higher than the bank credit in 4 years. Chart 9 shows the classification of the outstanding credit by the sample companies into short term loans (STLs) and long term loans (LTLs). For better presentation, only two time periods (FY13 and FY18) have been studied. Chart 9: Classification of the loans granted by NBFCs into short term and long term (%) 1 100.0 80.0 60.0 40.0 53.2 52.3 91.2 92.4 88.6 85.9 46.8 47.7 8.8 7.6 11.4 13.5 2013 2018 2013 2018 2013 2018 HFC FSI TL STL LTL Though the short term lending undertaken as a proportion of total lending has reduced in case of HFCs, it has been observed that the share of short term lending has increased in case of FSI and Term lending institutions. In case of HFCs, despite the fall in share of short term credit disbursed, the total short term lending has doubled and rose at a CAGR of 16% during FY13 to FY18. In case of term lending institutions, the total short term lending has doubled and witnessed a significant CAGR of 15.5% during FY13 to FY18. The RBI study highlights the exposure of NBFCs credit to key sectors during FY12 to FY17. Data shows that the credit towards industry has declined after scaling a peak of 62.8% of the total credit in FY15 to 59.6% in FY17. There has been a higher exposure towards the services and retail segments. The retail segment which includes housing loans, vehicle loans and education loans has witnessed a significant rise from 3.4% in FY15 to 17.7% in FY17. The share of services sector has increased from 11.5% in FY15 to 14.7% in FY17. The reorientation towards services and retail segments is an indication of increasing credit disbursed for short term and medium term projects. However, the majority share of credit (59.6%) continues to be extended to the industry sector for long term turnkey projects. Profitability indicators This section covers few profitability indicators of the NBFC sector as a whole which will give an understanding of the performance of this sector during FY13 to FY18. Chart 10 summarise the total income during the last 5 years and the growth in the income during this period. It is observed that, barring FY16, the total income of the sample companies under study has witnessed rapid and double digit growth in income. The total income of these companies has grown at CAGR of 12.2% during FY13 to FY18. 9
Total Income Income growth (%) Chart 10: Total income (Rs. lakh crs) and income growth (%) 2.5 2.0 1.5 1.0 16.7 15.4 11.5 5.8 12.1 1 0.5 1.5 1.7 1.9 2.1 2.3 Total Income Growth Note: Figures within the bar represent total income Chart 11 exhibits the share of income of each of the three categories of NBFCs and juxtaposes with the share of credit (outstanding loans and advances) for FY13 and FY18. The credit share covered in the following chart is the quantum of the outstanding credit of the NBFCs as at the end of the year. The objective of the following chart is to find out which category of the NBFC sector has the highest share in total income, total credit and how has it changed between FY13 and FY18. Chart 11: Share of individual categories in total income (%) and total credit (%) in FY13 and FY18 50.0 40.0 30.0 26.6 39.2 34.3 34.4 28.0 37.6 24.0 40.4 35.6 30.6 22.7 46.7 FY13 FY13 FY18 FY18 Income share Credit share Income share Credit share TL FSI HFC The share of total income for FSI has declined from 39.2% in FY13 to 35.6% in FY18 while that of TLs has declined from 26.6% in FY13 to 24% in FY18. On the other hand, the income share of HFCs has increased from 34.3% in FY13 to 40.4% in FY18, now contributing the highest income share among the three categories, based on the samples covered. 10
PAT Growth in PAT The significant increase in the share of income for HFCs can be ascribed to the rise in the credit share of the HFCs from 37.6% in FY13 to 46.7% in FY18. The HFCs also has the highest share in outstanding credit in FY13 and FY18. Chart 12 analyses the profit after tax (PAT) and its growth during FY14 to FY18. There was a significant decline in growth of PAT from FY14 to FY18 from 18.1% in FY14 to 1.9% in FY17. The PAT has been upbeat and grown by 29.2% in FY18. The moderation in profit growth in FY17 can be attributed to increased provisioning norms for the NBFC sector as well as increased public funding raised by the sector companies. The provisions in case of TLs witnessed a sharp increase of 156% in FY17 over a growth of 109% in FY16. Similarly, the FS/I also witnessed a growth in provisions of 38% in FY17 over a growth of 43% in FY16. The growth in provisions in case of HFCs during FY17 was relatively lower compared to the other categories and stood at 12% in FY17 over a growth of 201% in FY16. Demonetisation is also another factor which led to moderation in credit disbursements to various sectors during FY17 which in turn had an adverse impact on income and profits. The significant jump in credit of 19.6%% and moderation in provisioning in FY18 has led to a growth in PAT in FY18. Chart 12: Profit after tax (PAT crs) and growth in PAT (%) 50,000.0 47,104 3 40,000.0 30,000.0 20,000.0 10,000.0 29.2 34,226 35,778 36,455 30,517 18.1 12.2 4.5 1.9 30.0 2 1 PAT Growth The share of housing finance segment has increased from 33.7% in FY14 to 46.7% in FY18, having a scaled a peak of 48.6% in FY17. The share of FSI segment has remained relatively stable at around 30% during the last 5 years while the share of term lending institutions have witnessed a significant decline from 33.4 % in FY14 to a low of 20.1% in FY18. The decline in profit after tax during FY14 to FY17 is also reflected in the decline in return of assets (ROA) indicator from 2.4% in FY14 to 2.1% in FY17. The provisions in the overall NBFC sector have more than tripled in the last 5 years having witnessed a CAGR of 26.7% during this period. Chart 13 exhibits the trend of the quantum of the NBFC provisions. 11
Chart 13: Total provisions of the NBFC sector (Rs. crs) 20,000 15,000 10,000 5,000 4,955 6,024 10,179 16,769 16,002 In FY18, the highest share of provisions of 57% is observed in the FSI segment followed by term lending institutions (28%) and housing finance companies (15%). This increase in provisioning in overall NBFC sector during FY17 can be juxtaposed with NPA ratio for this sector. The Financial Stability Report released for the June 2018 gives the breakup of the Gross Nonperforming asset (GNPA) ratio and Net Nonperforming asset ratio (NNPA) ratio from FY13FY18. This calculation is based on a detailed study by the central bank based on 11,402 NBFCs and is presented in Table 2. The table shows that the asset quality (GNPA ratio) of the NBFC sector worsened in FY17 to 6.1% and has marginally moderated to 5.8% in FY18. However, it is to be noted that the asset quality of the banking sector has declined at a much faster rate from 3.2% in FY13 to 11.6% in FY18. Recent RBI frameworks for NBFCs GNPA ratio NNPA ratio FY14 2.7 1.2 FY15 2.9 1.6 FY16 4.3 2.4 FY17 6.1 4.1 FY18 5.8 3.5 Source: RBI To address the liquidity crunch faced by some segments of the NBFC sector, primarily on account of asset liability mismatches, the RBI has come up with regulatory relaxations to ease the challenges of the sector. Banks are permitted to raise their exposure to a single NBFC (noninfrastructure financing NBFC) from 10% to 15% until the end of the year. Till Dec 31, 2018, the government securities equivalent to the incremental credit disbursed by the banks to NBFCs after October 19 will be eligible for Liquidity Coverage Ratio (LCR) requirements. This is in addition to the 13% carve out from Statutory Liquidity Ratio (SLR) norms permitted for use against LCR requirements. To provide partial credit enhancement (PCE) to bonds issued by systematically important nondeposit taking financial companies (NBFCs) registered with RBI and HFCs registered with National Housing Bank. Concluding Remarks The total outstanding borrowings of the NBFC sectors under study, which is the primary source of funding has increased at a CAGR of 14.1% during FY13FY18 which has been at a commensurate pace with the CAGR of 14.4% in the overall credit during the same time period. 12
The share of the short term borrowings (as a proportion of total borrowings) of FSI segments and TLs have either been stable or decreasing. In case of HFCs, the share of short term borrowings (as a proportion of total borrowings) has witnessed a significant increase during the previous 5 years. The growth in all the three categories has been doubledigit and robust barring exceptional years for certain categories in the NBFC sector. This faster growth in credit has in turn translated into higher borrowings in the NBFC sector during FY13FY18. A peak in the ratio of the potential current repayments to total borrowings in FY18 is an indication of higher repayment pressures on the overall NBFC sector. The overall NBFC sector credit growth has been significantly faster in FY18 than the bank credit growth. Although the growth in the total income of the sample companies in all 3 categories has moderated during FY14FY17, the income growth has been robust and doubledigit barring FY16 which had single digit growth in income. The growth in incomes is at a commensurate pace with the growth in the credit extended by the NBFC sector has a whole. The growth in the net profits of the sample companies at the aggregate level (all categories taken together) has moderated from 18.1% in FY14 to 1.9% in FY17 which can in part be attributed to higher NPA provisioning during this period. In addition, during this period, the return on total assets also declined from 2.4% in FY14 to 2.1% in FY17. The robust credit growth in FY18 and moderation in the NPA provisioning in FY18 has translated into a significant increase in the net profits in FY18. It is to be noted that faster credit growth could be partially covering/lowering the NPA provisioning in FY18 as well. CARE Ratings Limited (Formerly known as Credit Analysis & Research Ltd) Corporate Office: 4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai 400 022. CIN: L67190MH1993PLC071691 Tel: +91226754 3456 I Fax: +91226754 3457 Email: care@careratings.com I Website: www.careratings.com Follow us on /company/care Ratings /company/care Ratings 13