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18 tweets,
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1. NBFCs grew fast, led by retail loans, Bingeing on cheap money. This in turn created a virtuous cycle -as numbers kept growing, so did cheap credit. While ~11,400 NBFCs operate in India, the top 400 —primarily backed by banks and fin. companies— control 90% of the sector’s AUM.
2. Between FY13-17, nearly $57B flew into Indian bond & liquid funds, resulting in wholesale borrowing rates fall to as low as 6-7% around mid-2017.
Interestingly, the flow of cheap money changed the funding mix of NBFCs over the decade and re-adjustment became more pronounced...
Interestingly, the flow of cheap money changed the funding mix of NBFCs over the decade and re-adjustment became more pronounced...
3. ..during the last five years. Bank funding (as %) went down and market borrowing (as %) went up. Low rates resulted in NBFCs borrowing significantly from wholesale market, mutual funds, banks, etc. and lending it primarily for retail loans.
4. Retail debt to GDP went up from about 12% in FY12 to almost 18% in FY19. Today, the combined balance-sheet all NBFCs stand at ~$300bn with loan portfolios that grew at twice the pace of banks.
5. Some NBFCs grew without paying attention to their capital structure. They went for cheaper short-term funding, which mutual funds, too, bought in as lot of money was flowing into AMCs.
6. NBFCs borrowed very short due to ~100 bps differential between 6M-3Y money to maximize margins. However, funding long-term assets with short-term borrowing always leads to an asset-liability mismatch.
7. Now over ~200bps jump in the wholesale market rates has spoiled the play. The IL&FS default also resulted in MFs turning a bit wary of short-term lending. MFs hold about $46B of NBFCs debt. The exposure of the wider Indian banking industry was about $92B in March19.
8. MFs own 60% of NBFCs’ commercial paper, Of these ~ 40% borrowings are maturing in the next 6 months and any liquidity/redemption pressure would increase the refinancing risk and cause NBFC debt yields to spike further.
9. Chasing lower marginal COF in order to retain or acquire market share in lending is a myopic. The business model comes under pressure in case of ALM and liquidity issue. Hence, this resolution of current liquidity issues might take another 12-18 months.
10. India still has among the world’s worst stressed asset ratios, bad credit as a share of total loans is high as~ 10.3%. With India’s banking sector grappling its biggest corporate bad-loan mess, the focus, in past 3 years, shifted to retail-credit growth.
11. Combine that with fault-lines in commercial portfolio (demonetization, and GDP slowdown), the retail customer became the ‘new darling’ of all bankers in town.
12. This brings me to second part of tweet-thread: "Only consumption booms that are accompanied by an increase in investments tend to be sustainable."
13. Even as India’s total bank credit to GDP ratio declined by about 100 bps over FY12-2017, the “retail credit" to “private consumption" ratio rose by about 150 bps over the period.
14. This rise of consumption growth appears to be the result of the rise of retail credit. As corporate credit demand waned, banks and NBFCs aggressively pushed retail credit, resulting in India’s retail credit-to-GDP ratio rising from 13% to 16% during FY12-17.
15. So is this retail credit-fueled consumption growth sustainable? —Unlikely.
During 2012-17 Indians saved less, spent more. Indian H/holds’ savings% has dropped to an 18-yr low of 19% of GDP, and the current bout of consumption growth is not supported by any investment growth
During 2012-17 Indians saved less, spent more. Indian H/holds’ savings% has dropped to an 18-yr low of 19% of GDP, and the current bout of consumption growth is not supported by any investment growth
16. This will not last unless we invest and create jobs. After Corporate NPA problems (~$200B), Retail NPA problems have started to become visible. Huge gap in consumption and investment cycles (during 2012-17) has further accelerated this process.
17. Retail funded credit consumption is not sustainable in a contraction cycle. It gets worse when combined with the onset of new credit cycle. Stress already visible in Micro-finance, HFC portfolios. Next impact will be on credit-card and unsecured portfolios.
18. The easier option of consumption-led growth may not be best for Indian economy. As for new alt-lenders: remember-“The map is NEVER the terrain.”
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