NBFC's in India - weathering a storm!

8th Nov 2016 - a date which the whole Finance Industry in India will not forget specially NBFC's. The day Prime Minister of India, Sri Narendra Modi announced demonetisation and banned old Rs. 500 and Rs. 1000 notes.

This event created queue's outside the banks for withdrawal and ATM's went dry. The energy of the whole banking community was on serving the depositors for the next 3 months.

This impacted the NBFC's visibly on two fronts (a) Repayment Collection and (b) Loan disbursal. RBI report "Impact of Demonetisation on Financial Service" has lot of positives to talk and hidden are the negatives on NBFC's. Keeping in line with the topic, let me highlight the negative impact:

Please observe the dip in repayment collections, specially for Microfinance industry. The repayments saw a jump post 6 months (i.e. March'2017).

The business impact was much worse and for next 4 to 5 months new loan disbursals was down by 30% to 40%.

Imagine the "Negative Carrying Cost" NBFC's paid during this time for the liability NBFC's were holding on the Balance Sheet.

In the interest of keeping the article crisp let me list a few more events which have happened and fast forward to 2020

1. 
   
2. July 2017 - GST
3. August ' 2018 - ILFS default
4. June ' 2019 - DHFL - Default

You will observe from the data the preference for Consumer Loans and distancing from MSME loans as a strategy by NBFC's.

Boston Consulting Group (BCG) along with CII had written a bullish paper in Dec 2015 - NBFC 2.0 without knowing the above challenges coming towards NBFC's.

BCG Study NBFC 2.0 had projected ROE of 14.6% for NBFC's in the coming years.

That has not held true and the RBI report shows a mere 6.6% ROE for NBFC's for 2019 and a downward trend.

Bajaj Finserve has ROE of 20%+ - that is why a darling of many investors.

Fast Forward to Post Covid-19. India has crossed 90 days of lockdown and RBI has extended moratorium of payments till August'2020. I have been speaking to the various intermediaries Offline loan originators (DSA's), Online loan Aggregators (various websites), Service Providers (KYC, Bank Statement analysers, Contact Point Verifications), Credit Bureau's (CIBIL, CRIF, Equifax and Experian), NBFC's and Banks.

The common thread of these discussions (not quotes) are:

• The situation remains fluid and we are observing closely.
• Focused on repayment collection, digital capabilities and managing moratorium.
• Working on cost re-negotiations with various service providers including rentals. Laying off people is the last resort however given the prolonged nature of lock-down this option is not ruled out.
• Demand for loans and Loans Disbursal is down 70% to 80%. Also, unemployment rates are high and can still go up which was NOT the case in the previous situations. Thus NBFC's, with excess liquidity are facing a significant "negative carry".
• Lending companies (Digital Lenders) who work on FLDG (First Loss Default Guarantee) with NBFC's process have seen their lines withdrawn or FLDG increased.
• NBFC's are focused on building collection capabilities (tele-calling, field and legal) as post 6 month moratorium customers may not be contactable.
• NBFC's will need to raise capital for repaying the liabilities which are maturing between April-September 2020.
• NBFC's will experience peak losses / NPA's during Dec-20 to Feb/Mar'21. Once again a need for Capital raise to maintain the requirement of RBI.

To summarise, given the consistent challenges beyond NBFC's control, Asset Liability mismatch tenure mismatch, Interest Rate Risk as well as Negative Carry in these circumstances - I salute the NBFC CEO's and team steering their organisations through this unforeseen circumstances.

However I wish to ask, is there a better business model than NBFC's to keep serving the upcoming demand for Credit? Please look out to my next blog.

Reference material:

https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/IDFS5EBBDCCB9C274F0E921997DA8EC93CCA.PDF

https://m.rbi.org.in/Scripts/PublicationsView.aspx?id=19367

https://image-src.bcg.com/Enormous-Potential-Non-Bank-Finance-Dec-2015-India_tcm21-28746.pdf