'NBFCs growth in FY21 Q2, Q3 points to resilience'

NBFCs growth in FY21   Q2, Q3 points to resilience

Mumbai: The double-digit growth registered by non-banking financial companies (NBFCs) during the second and third quarters of 2020-21 amid the disruptions caused by the COVID-19 pandemic reflects the ''resilience'' of these entities, an RBI article said. The article is prepared by Nandini Jayakumar, K M Neelima, and Gopal Prasad, from the Department of Economic and Policy Research under the guidance of Ashok Sahoo, Adviser. The views expressed in the article are those of the authors and do not represent the views of the Reserve Bank of India (RBI).

The consolidated balance sheet of NBFCs registered a Y-o-Y growth of 13 per cent and 11.6 per cent in Q2 and Q3 of financial year 2020-21, respectively, the article, Performance of NBFCs during the Pandemic: A Snapshot, published in the RBI''s bulletin for May 2021 said. This deceleration compared to corresponding quarters of 2019-20 could be attributed to the COVID-19 induced economic slowdown and weak demand, it said.

"However, this double-digit growth in an adverse macroeconomic environment points to the resilience of NBFCs, which were able to cushion the impact of the pandemic on their balance sheets through quick adoption of technology, policy support and reasonably strong fundamentals," the article said.

The article covers only those NBFCs which have regularly filed returns in all quarters from March 2019 to December 2020.

The NBFCs represent around 78 per cent of the assets of the NBFC universe in December 2020. The article said as the impact of COVID-19 spilled over onto the real sector in 2020-21 due to the imposition of lockdowns, social distancing and a near standstill in economic activities, NBFCs have been hit hard.

The impact of the pandemic can be seen on both asset quality and liquidity, although the latter was addressed to a considerable extent through timely policy measures, it said.

The profitability of NBFCs dipped in the immediate aftermath of the COVID-19 in the first quarter of 2020-21, as businesses suffered economic losses due to nation-wide lockdowns. Both return on assets (RoA) and return on equity (RoE) deteriorated in Q1 FY2020-21 compared to the corresponding period in 2019-20.

"However, the situation improved marginally in Q2 FY2020-21 as NBFCs'' expenditures registered a steeper fall than income," the authors said.

RoA and RoE improved from 1.8 and 10.3 per cent, respectively in Q2 FY2019-20 to 2.3 and 12.7 per cent, respectively in Q2 FY2020-21. The profitability of the sector remained stable in the third quarter of FY2020-21. The gross non-performing assets (GNPA) ratio of NBFCs was elevated in Q1 and Q2 of FY2020-21 compared to the corresponding period in 2019-20, the article said. In Q3 FY2020-21, both GNPA and net NPA ratios fell compared to Q3 FY2019-20.

"The asset quality of NBFCs witnessed improvement in 2020-21 so far, compared to Q4 FY2019-20 on account of regulatory forbearance; the full effect of the pandemic on asset quality, however, may only become evident over time," it said.

The article said NBFCs posted 4.8 per cent and 2.5 per cent credit growth in Q2 and Q3 of FY2020-21 (Y-o-Y), respectively. Loss of income and livelihoods and subsequent fall in consumption demand as well as discretionary spending resulted in NBFCs'' credit growth remaining in a modest zone in contrast to their usual robust trend, the authors said.

The industrial sector remained the largest recipient of credit from NBFCs-ND-SI (non-deposit taking systemically important NBFCs) even as its share moderated between Q3 FY2019-20 and Q3 FY2020-21, they said.

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