Mumbai: The imminent slowdown in credit growth of non-banking financial companies (NBFCs) could lead to a credit crunch in India, with overall system credit growth falling to less than 10%, Credit Suisse said in a report.

In addition, public sector banks are constrained for capital, including 11 banks under prompt corrective action (PCA), and private lenders who have been struggling in mobilisation of deposits with loan-to-deposit ratios (LDRs) in the range of 90-108% for some, said the report.

“NBFC/housing finance companies (HFCs) have played a major role in credit supply in recent years, accounting for 25-35% of incremental overall credit. Even as bank credit growth in the last two years has averaged at 7%, a strong 20%+ growth in NBFC credit aided overall credit expansion beyond 10%," said Credit Suisse.

Over the last few years, NBFCs/ HFCs have seen strong supply of funds from banks (43% year-on-year growth as of August 2018) and mutual funds (around 35% of debt assets under management), making this asset class among the largest exposures for these fund suppliers, said the report.

“Indeed, for the asset management company (AMC) industry, we believe some of the fund schemes could have approached maximum sector exposure levels, needing some course correction. In our analysis, a 10 percentage point reduction in overall NBFC/HFC exposure as percentage of total debt assets under management (AUMs) for mutual funds could take two months to happen, without any rollover," it said.

NBFCs, faced with constrained funding supply, may step up asset sell-downs, according to the report. Given the general healthy asset quality trends for NBFCs currently, banks have appetite for NBFC assets, Credit Suisse said.

“We believe NBFCs may find it easier to sell down their retail portfolios than wholesale portfolios, especially home loan portfolios which carry lower risk weights or retail portfolios qualifying for priority sector targets of banks may be easier to sell down," it said.

The report said NBFCs with a higher share of wholesale loans would find it difficult to find liquidity through sell downs. “Banks buying out NBFC portfolios is an inefficient way of using capital and may lead to shrinkage of overall credit on available capita," the report said.

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