With GDP growth of 4.5 percent, the lowest since 2013, the Indian economy is currently going through a rough patch. The year 2019 has been pretty turbulent for the entire market with the ongoing lack of credit growth and consumption.
Combined with this, it is worrisome that the consumer inflation has risen to a 16-month high of 4.6 percent, breaching the RBI’s 4 percent target, due to higher food commodities. Although the government has announced a series of measures in recent months to improve the liquidity and fiscal situation, but the momentum is not really promising.
To tackle this, we believe that in addition to the multiple repo rate cuts, the government should also focus on bringing in other structural changes. It would also be helpful to wait and see the combined impact of all reform measures – including partial credit guarantee scheme, permission to banks to provide partial credit enhancement, increase in single borrow limit on exposure to NBFCs and relaxation of securitisation guidelines – and how the growth-inflation dynamics will develop.
Although the overall repo rate has been cut by 135 basis points in 2019, it had not resulted in the necessary impetus required for the economy. In our opinion, the key problem affecting the entire financial ecosystem is the heightened risk aversion by the banks. The lending to NBFCs is still slow with the ongoing concern regarding the health of companies in this sector. This has also limited the reach of the real benefits of the reform measures as it could not be transferred to the common man. We have recently witnessed an acute drop of 34 percent in the amount of loans sanctioned by NBFCs and hence, it is high time that the banks improve on credit to NBFCs like us serving the deprived masses.
NBFCs are a key driver of the economy and while banks were struggling with NPAs, credit provided by NBFCs fuelled both consumption and investment in India. The NBFC industry has been representing the aspirations of the common man and has always contributed towards GDP growth of the country. It is essential for the government to provide support to NBFCs in order to boost consumer lending and subsequently increase demand in key sectors like automobile and housing.
On the bright-side, banking sector non-performing assets (NPAs) are expected to decline anew to ~8 percent by March 2020, given lower accretion and increased recoveries. Credit growth should also grind up to 14 percent, the highest in five fiscals. Seasoning of retail portfolio and performance of the small and medium enterprise (SME) portfolio after the restructuring period will be the key monitorables.
There is also an urgent need for banks to expedite the transmission on non-repo linked loans. While the external benchmark system was introduced to link the banks’ lending rates to the repo rate of the central bank, limited benefit has been passed on to the customers. It has been delayed much and it is imperative to improve the transmission at a faster pace.
NBFCs also have to be cautious of managing their asset-liability. The line of credit is for a short duration while NBFCs lend ahead for longer periods; this creates a dangerous mismatch that ultimately goes out of control. Hence, the companies will have to infuse long-term funds and keep a close watch on their ALM (Asset Liability Management) profiles. We are also looking forward to the apex bank to carry out structured interactions with NBFCs to discuss their issues related to funding, liquidity and functioning. There are several non-banking companies that have good models and are lending to niche segments. We believe the NBFC industry will come back very strong once this crisis is over.”
Views expressed in this article are the personal opinion of Thomas John Muthoot, CMD, Muthoot Pappachan Group.