MUMBAI, June 7: Credit growth is unlikely to pick
up despite the three successive rate cuts by the central bank
due to the capital constraints at banks and the deepening
crisis in the non-banking lenders sector, warns a report.
The Reserve Bank had cut its key policy rate Thursday
by 25 bps, its third such move in successive policy reviews in
2019, to a nine-year low to help spur sagging growth.
“We expect credit growth to remain slow, despite the
latest interest rate cut, as most banks are capital-
constrained and non-banking financial institutions are facing
tighter funding conditions,” global rating agency Fitch said
Friday in a note.
It said NBFCs currently account for a fifth of the
overall credit as against 15 percent five years ago.
Meanwhile, on the troubled Dewan Housing Finance, the
report termed the recent events as a “demise”, highlighting
the funding risks for the broader NBFC sector. Issues with
NBFCs were already known to the market but Dewan became a
focus point after the failure of IL&FS last September
contributed to a sector-wide liquidity squeeze as investors
turned risk averse, it noted.
“Liquidity of NBFCs is sensitive to market sentiment
as their business models rely on short-term wholesale funding,
which can dry up fast if market sentiment turns negative,” the
report said and explained that because of these pressures, top
NBFCs have begun to explore other sources of funding and are
working onto start tapping the overseas bond markets.
Accordingly, the agency expects NBFCs to become more
regular issuers in the offshore bond markets, which can be
“credit positive” if managed prudently.
The funding squeeze has led to increased cost for the
shadow banking sector and a slowdown in loan growth them, the
report said, noting that these players are an important
channel for extending credit to the wider economy with wide
distribution networks.
Non-performing assets-related issues at banks only led
to NBFCs’ importance growing much higher, it said, adding
NBFCs’ fast loan growth in an environment of relatively benign
interest rates was increasingly funded by short-term funding,
in particular, commercial papers issued to mutual funds.
It can be noted that in the past as well, analysts
have pointed out to asset liability mismatches as the real
problem that led to the problems for the NBFCs since the
latter half of 2018.
Traditionally, the banking system has been an
important source of funding for NBFCs due to a push to
“priority lending”, while the mutual funds segment has also
deployed investments.
“Both of these funding sources for NBFCs have become
more risk-averse, which means that the sector is likely to
face higher funding costs and a period of deleveraging,
although the better-positioned NBFCs should still be able to
achieve loan growth,” the agency said. (PTI)
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