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Sharp decline in the disbursement levels of non banking financial companies (NBFC's)

CRISIL has observed a sharp decline in the disbursement levels of non banking financial companies (NBFCs) over the past two months, as NBFCs have focused on repaying their maturing short-term obligations to mutual funds (MFs). The decline in disbursements was as high as 70 per cent in one case, with the average at around 50 per cent for CRISIL-rated NBFCs, pointing to the severity of the business shrinkage.

While the going has been difficult for the sector, CRISIL nevertheless sees NBFCs’ business and financial profiles generally stronger today than they were during the crisis of the late 1990s. In addition, many NBFCs have strong parentage, enhancing their credit strength.

According to Ms. Roopa Kudva, Managing Director and Chief Executive Officer, CRISIL “Despite increased delinquencies in NBFC portfolios, cash flows from existing assets will allow maturing debt obligations to be met on time. However, the decline in business volume will mean a further marginalisation of the sector, a trend that has been accelerating over the past few years as banks have taken over the traditional NBFC stronghold of retail lending.”

CRISIL believes that the NBFC business model will change over the long term, with a focus on product innovation, and a move towards the originate-and-sell model.

NBFCs’ balance sheets have a significant asset-liability mismatch; more than 50 per cent of NBFCs’ borrowings have maturities of less than one year, while most of the assets have tenures of about three years. Further, the dependence on MFs for short-term funding has been high: CRISIL-rated NBFCs’ estimated borrowings from MFs have increased to more than 45 per cent of total borrowing as of September 30, 2008, from 30 per cent as on March 31, 2006.

Increasingly facing redemption pressures, MFs are no longer lending to the NBFC sector, and are withdrawing their existing exposures as these mature. The recent measures announced by the Reserve Bank of India (RBI), allowing NBFCs increased access to funding, will indeed ease their debt servicing pressures, but will not address the longer-term issue of business growth.

CRISIL has analysed the disbursement pattern of its 33 rated NBFCs, which represent 30 per cent of the total NBFC sector. Most of these NBFCs, especially asset finance companies, have significantly slowed down disbursements because of a lack of funds: the average monthly disbursements during September and October are estimated to be half of disbursements during August. NBFCs’ share in the overall retail finance space has reduced over the past few years as banks, with their superior size and resource diversity, have achieved dominance: banks today make more than two-thirds of retail finance disbursements, up from about 20 per cent in 2002.

CRISIL does not expect this trend to reverse. Over the next few years, CRISIL expects NBFCs’ role to transform itself into one of innovation and partnership. Says Mr. Tarun Bhatia, Head, Financial Sector Ratings, CRISIL, “As innovators, NBFCs will build business models and incubate markets before the banks step in, and as partners they will combine their origination capabilities

(This is press release of crisil dated November 10, 2008)

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