Need for greater surveillance over large housing companies and NBFCs: RBI

Over the report of financial stability in June 2019 Reserve bank of India focuses on the rapidly increasing need for surveillance over large housing finance companies (HFCs) as well as non-banking financial companies (NBFC). During this report on Thursday RBI also cautioned about the contagion arising from insolvency from these large (NBFC) or (HFC) could lead to losses equivalent to big banks.

It also points out that the top five solvency loss-inducing institutions are none other than HFCs.

Stress tests which gave results for each NBFCs pointed the two scenarios of ascendant of gross non-performing assets (GNPA) ratios, Even the minimum regulatory capital requirement of 15% will not be achieved by 8% of companies. Even 13% of them are not promising to comply with the minimum regulatory capital to risk assets ratio (CRAR) norms.

While the net NPA ratio declined from 3.8% in 2017-18 to 3.7% in 2018-19. GNPAs and CRAR of the NBFC sector advances from 5.8% in 2017-18 to 6.6% in 2018-19 and 19.3% - 22.8% respectively.

Pointing out the risk emerging from NBFC credit standards specially for the four consumer products – auto loans, home loans, loans against property and personal loans, the Central bank mentioned "A look at the evolution of delinquency levels in each of the segments shows that NBFCs as a group have been leading delinquency levels in almost all the sub-segments of consumer credit. When uniform delinquency norm of 90 days past due (dpd) is applied.''

Increasing importance in credit intermediation has brought the focus on the NBFC sector, inclusive of HFCs, especially according to the quality of their exposure of asset-liability mismatches (ALM). In the third quarter of FY19, the liquidity stress reflected in NBFCs was due to an increase in funding cost. The central bank also mentions "Despite the dip in confidence, better performing NBFCs with strong fundamentals were able to manage their liquidity even though their funding costs moved with market sentiments and risk perceptions,"

According to the commercial paper market, there is a colossal declining of absolute issuance of CPs by NBFC when compared to its previous defaults levels by IL&FS entities. RBI also mentions that the stress period reduced the risk-appetite as the CP spread of all entities increased. Subsequently, there is a reduction in CP spread for NBFCs and its gap with other issuers has narrowed. The FSR also observed "Thus, in a way the IL&FS stress episode brought the NBFC sector under greater market discipline as the better-performing companies continued to raise funds while those with ALM and asset quality concerns were subjected to higher borrowing costs,"