After the massive fallout in the non-banking financial companies (NBFCs) last year, majority lending institutions saw their liquidity drying up. This resulted in not only affecting the funding mix of NBFCs but also the mutual fund’s share declining sharply by about 100 percent. Speaking on the liquidity crisis that escalated more prominently this year, Credit Suisse in its recent report agreed that the credit crunch has intensified and that the overall loan growth has dropped to lows of 6 percent that hit during the demonetisation time.

The report said that post IL&FS disaster last year, the growth in NBFCs and HFCs has slowed down to 7 percent from 22 percent earlier, which has resulted in a slowdown in both private (down 8 percent) and PSU banks (down 3 percent). As expected MFs cut NBFC exposure by 30 percent, which resulted in NBFCs increasing sell-downs and higher bank funding. In fact, NBFC exposure for most PSU banks has come down to currently 10-15 percent of their loan book. For short-term paper, the spread on borrowing costs among NBFCs has widened to historic highs of 400 bps+.

In bond markets, the long-term funding is only open for better-perceived NBFCs who are the beneficiaries of the excess system liquidity and RBI’s repo rate cuts, noted the brokerage. While others saw a sharp reduction in bond issuances (40 percent YoY) in the month of October. In fact, access to shorter-term money has also been limited for some NBFCs, adding more pain to the sector, said the brokerage.

The credit crunch has turned so bad that some of the NBFCs saw a 100 percent cut in MF funding, except LIC Housing Finance and Bajaj Finance. As MF’s exposure in the NBFCs reduced, banks came a little ahead to help the sinking sector.

In September 2019, bank lending to NBFCs rose 30 percent YoY, accounting for 8.5 percent of banking sector loans. The NBFCs also resorted to sell-downs for liquidity management in meeting their debt obligations, the report added.

After lending to the NBFCs, most banks saw higher NPAs this Q1FY20. Credit Suisse remained positive on larger corporate lenders including SBI, Axis Bank, and especially ICICI Bank (preferred pick).

In its report, it stated that despite pressure in the system, loan growth for these three banks will remain healthy, given their strong traction in retail loan books which have become a sizable part of overall loans over the past five years.