NBFC crisis poses growth headwinds

The crisis of confidence in non-banking financial companies (NBFCs) may prove a drag on economic growth, as balance sheet constraints and higher funding costs may prompt these shadow banks to slowdown lending, warns a report.

But this will come as a growth booster for banks, which for long have been ceding credit market share to NBFCs, which had accounted for 12-15 per cent of the total credit generated in the past two fiscals.

Warning that lower credit availability from NBFCs will hurt growth, Singaporean lender DBS’ economist Radhika Rao said, “The likelihood of stricter lending controls on NBFCs and tougher operating environment is likely to impinge on their ability to expand their books, prompting them to scale back their aggressive growth targets....As a result overall credit availability is likely to moderate, which in turn will be hurting growth.” However, the slower growth can reduce the asset quality concerns, if incremental funding is deployed in quality loans rather than high-risk loans.

The difficulties faced by NBFCs, which for long have been credited for deepening credit flow to pockets where banks have not been able to operate, poses a downside risk to DBS’ FY19 GDP growth estimates of 7.4 per cent and 7.8 per cent the fiscal later, she said.