New Delhi, Jan 12 (KNN) Asset quality of Non-Banking Financial Companies (NBFCs) is expected to deteriorate further due to business disruptions caused by the Covid-19 pandemic, especially in the industry sector, one of the major recipients of NBFC credit, according to the latest financial stability report (FSR) by the Reserve Bank of India (RBI).

According to the report, NBFCs saw a decline in growth in 2019-20, largely due to isolated credit events in a few large NBFCs, challenges in accessing funds and the overall economic slowdown, with the pandemic’s impact adding to the stress in the later period. During 2019-20, credit extended by NBFCs grew by 4.4 per cent as compared with 22 per cent in 2018- 19.

''Gross NPAs of NBFCs increased from 5.3 per cent of total advances as of March 2019 to 6.3 per cent as of March 2020,'' RBI said in its report on Monday.

A System level stress tests for the NBFC sector’s credit risk were conducted for a sample of 200 NBFCs 27 with asset size of more than 1000 crore as on March 2020 reveals that under a high risk scenario the gross non-performing assets (NPAs) of NBFCs may increase from 6.8 per cent to 8.4 per cent, while in a medium risk scenario, it increases to 6.9 per cent.

''As of March 2020, NBFCs recorded gross NPAs of 6.3 per cent, up 100 basis points from March 2019. Also, during 2019-20, credit extended by NBFCs grew by 4.4 per cent against 22 per cent in 2018- 19,'' the report added.

The apex bank in its report further said that stress tests at the individual NBFC level indicated that under the baseline, medium and high risk scenarios, CRAR of 3.3 per cent, 9.7 per cent, and 10.3 per cent of NBFCs would fall below the minimum regulatory requirements.

The FSR report of RBI further goes on to say that NBFCs and housing finance companies (HFCs) are the largest borrowers of funds from the financial system. And, a substantial part of funding comes from banks. Therefore, failure of any NBFC or HFC will act as a solvency shock to their lenders, which can further spread by contagion.

Since, as per the report, NBFCs were the largest net borrowers of funds from the financial system, with gross payables of Rs 9.37 trillion and gross receivables of Rs 0.93 trillion at end-September 2020, HFCs were the second largest borrowers of funds from the financial system, with gross payables of around Rs 6.20 trillion gross receivables of Rs 0.53 trillion as at end-September 2020.

''In the non-bank space, the dominant positions occupied by mutual funds and insurance companies need to be assessed against the fact that non-banking financial companies and housing finance companies remain the largest borrowers, with systemic implications. Meanwhile, shrinking of the inter-bank market has reduced the risk of bank failure due to contagion effects,'' the RBI said.