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MOSL: Fuel or Engines (Economy): Role of NBFCs in India’s growth story; Nascent recovery in investments may get hurt

Fuel or Engines (Economy): Role of NBFCs in India’s growth story; Nascent recovery in investments may get hurt

 

• An analysis of India's non-banking financial company (NBFC) sector, including housing finance companies (HFCs), reveals that its share in the outstanding debt of the non-government non-financial (NGNF) sector1 has risen from 15% in FY13 to 20% in FY18. For the first time in India's history, the contribution of NBFCs2 to annual incremental NGNF debt was as high as ~40%, up from 29.2% in FY17 and sub-20% in the pre-FY15 period. Our calculations suggest that NBFCs' loan book increased by INR5.1t (3% of GDP) in FY18, while banks' lending rose by INR6.5t. Corporate bonds (CBs) and commercial papers (CPs) issued by the non-financial sector, however, slowed sharply in FY18.
• As far as exposure of NBFCs to the real economy3 is concerned, our estimates suggest that almost four-fifth of the loan book is exposed to the investment-intensive4 sector (including real estate and housing), implying that consumption-related loans were ~20%. Further, while the share of infrastructure loans has declined to ~31% in FY18, it is broadly replaced by commercial real estate that now accounts for ~16%.
• Moreover, NBFCs were the largest gross borrowers - on an annual basis - of funds from the financial system amounting to INR12.5t in FY18. Banks were the largest lenders to NBFCs accounting for ~42% of their total borrowings, followed by AMC-MFs (~33%) and insurance companies (ICs) (~19%). Over the last few years, while the share of banks and ICs to NBFCs' borrowings has declined, it has increased considerably for AMC-MFs.
• Finally, although NGNF debt was broadly unchanged at 84% of GDP in FY18, the debt intensity of real GDP growth increased from a multi-year low of 1.2x in FY17 to 1.5x. This was reflected in sharper-than-expected recovery in real investments, which grew at a 7-year high of 7.6% YoY in FY18.