As banks struggle, NBFCs improve their performance : RBI report

Non-banking financial companies (NBFCs) improved their performance on most metrics in the last fiscal year, as the banking industry struggled under the weight of a growing pile of bad loans.
According to the financial stability report (FSR) released by the Reserve Bank of India (RBI) on Tuesday, NBFC loans expanded 16.6% in the year, twice as fast as the 8.8% credit growth across the banking sector on an aggregate level.
The aggregate balance sheet of the NBFC sector expanded 15.5% in fiscal 2016 compared with 15.7% the previous year, the report said.
NBFCs also performed better in terms of asset quality, even though the bad loan norms for these firms are not as stringent as those for full-fledged commercial banks.
The gross non-performing assets (GNPA) ratio for the NBFC sector declined to 4.6% of total advances in March 2016 from 5.1% in September 2015, according to the FSR.
“While the regulatory norms for the NBFC sector are sought to be brought closer to those applicable to banks, the performance of this sector (return on equity and return on assets) seems to be much better as compared to that of banks,” the report said.
In November 2014, RBI revised the regulatory rules for NBFCs and said prudential norms would be brought on par with those for banks over a period of time. As a result, bad loan recognition rules were tightened and NBFCs were asked to label all loans on which repayment was overdue beyond 90 days as non-performing by 2018, in stages.
RBI’s study covered the 11,682 NBFCs that were operating as of March 2016.
Capital adequacy levels of the NBFC segment have also improved, unlike banks where capital was eroded. The capital adequacy ratio for NBFCs as a whole improved to 24.3% as of March 2016 from 23.85% in September 2015.
Stress tests for the sector showed that even under extreme stress, the capital of NBFCs may erode only marginally.
To be sure, not all NBFCs are so strong. Stress tests on individual NBFCs showed that 5% of the total 11,682 companies would be unable to comply with the minimum regulatory capital requirement of 15%.
In contrast, stress tests for banks showed that under severe stress, 20 banks that hold 38.4% of total credit would fail to meet the minimum regulatory norm for capital adequacy.
The relative strength of NBFCs has allowed them to garner more business as banks focus on resolving their bad loan issue and strengthening their books. 
“The key driver for the performance of NBFCs has been their business mix. The retail-heavy nature of NBFC portfolios has helped them maintain growth to some extent, while the corporate-heavy portfolio of banks have dragged down their growth. This retail focus has also helped the asset quality of NBFCs,” Crisil Ratings said in an e-mailed response to questions from Mint.
NBFCs that cater to niche segments have benefited immensely, said Crisil. Recently, many NBFCs have diversified their portfolio to mitigate risks to their core business, the rating agency added.