The systemic risks can intensify in the context of Covid-19 as the strength of the overall financial system has now been put to test following the spread of the pandemic.
“The declining share of market funding for NBFCs is a concern as it has the potential to accentuate liquidity risk for NBFCs as well as for the financial system,” RBI said in its July financial stability report.
RBI has also acknowledged the common market refrain that banks and bigger lenders have largely shunned the smaller and lower rated NBFCs in providing liquidity support even as the regulator devised a targeted window for those who are in dire needs.
With the waning of market confidence, the share of long-term market debt in total borrowings of the NBFC sector dipped to 40.8% at the end of December from 49.1% at end of March 2017. The consequent funding gap was met through bank borrowings, which rose to 28.9% from 23.1% of total borrowings over the same period.
The regulator’s system-level stress tests for the NBFC sector’s aggregate credit risk shows that the sector’s CRAR (capital to risk weighted assets ratio) could decline as much as 200-400 basis points from 19.6% seen at the end of March. The stress test results on individual NBFCs indicate that 19.5% of the companies may not be able to comply with capital norms under extreme cases.
The CRAR of the sector has fallen from 20.1% at the end of March 2019 and from 26.2% as of March 2015.
The gross non-performing assets ratio of the NBFC sector declined during successive quarters till September 2019 when it was at 5.6%, but then surged to 6.4% at the end of March.