NBFC funding to commercial sector fell 20%: RBI report

The Reserve Bank has blamed the fall of the IL&FS group and the resultant negativism on the sector for the near 20 per cent plunge in the flow of credit to the commercial sector from non-banking lenders in FY19.

Credit flow from NBFCs to the commercial credit stood at Rs 9.34 lakh crore as of FY19, down from a high Rs 11.60 lakh crore as of FY18, the RBI says in its annual report for 2019, released Thursday.

"The decline in flows from non-banking entities was mainly on account of the lower flows from non-deposit taking systemically important NBFCs (net of bank credit to NBFCs) and housing finance companies, particularly in the aftermath of IL&FS fall," says the report.

The decline continued into the first quarter of FY20 as well with lending by NBFCs to the commercial sector dipping to Rs 2.44 lakh crore from Rs 2.83 lakh crore in Q1 of FY19.

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A series of defaults by cash-strapped IL&FS starting September 2018 led to a liquidity crisis in the system, especially for NBFCs, housing finance companies and mutual funds. The IL&FS Group, under insolvency process, owes over Rs 99,000 crore to the system.

Moreover, lower issuances of debt and equity by non- financial entities and lower investments by LIC in corporate debt, infrastructure and the social sector has also resulted in lower credit flow in FY19, say the report.

"While flows from NBFC/HFCs declined, flows from banking sources--non-food bank credit--has increased and met financing requirements of commercial sector," it notes.

During FY19, there has been an improvement in the total flow of financial resources to the commercial sector, which has increased by 4.2 percent at Rs 21.642 lakh crore from Rs 20.764 lakh crore in FY18, notes the report.

The report, however, says there has been a sharp spike in CP sales, coupled with higher accommodation by four all- India financial institutions regulated by the RBI.

Among foreign sources, ECBs/FCCBs have seen net inflows for the first time in the past four years.

FDI inflows, which account for a major share of non- bank finance to the commercial sector, have jumped 18.9 percent during the year but short-term credit from abroad has declined during the year as import growth decelerated, the report says.

It further says the monetary aggregates and the behavioural ratios points to underlying economic activity gaining resilience but it is important to note that this is set against the backdrop of a slowdown that began since FY11.

While the mounting overhang of the impaired assets inhibited lending by the banking system, NBFCs have stepped in to intermediate resources to various sectors of the economy, notes the report.

As the events of FY19 show, there was irrational exuberance and considerable overleveraging, with asset- liability mismatches among NBFCs.

"Even though NBFCs constitute around 12 percent of the total assets of the banking and non-banking space, emergence of stress following isolated but large credit events and a wider perception of liquidity shortages reveals the degree of interconnectedness in the financial system and the systemic ramifications," the report says.

The ongoing strengthening of the liquidity and regulatory framework for NBFCs will be informed by this experience, especially in efforts to remove regulatory arbitrage, the report concludes.