New Delhi: For non-bank lenders and housing financiers that account for about a quarter of the credit market, the worst may be over and growth prospects are robust, but cost of funds still remains a challenge for many, according to industry watchers.

India’s shadow banking system has been struggling with liquidity pressures after payment defaults by group companies of Infrastructure and Leasing Financial Services Ltd last year. After a year, many non-bank finance companies (NBFCs) have learned to negotiate the troubles, say experts. Equity investors, who take a longer term view than lenders, are still very bullish about this sector.

According to Eric Savage, co-founder and chief executive officer of private equity firm Unitus Capital, which conducted a survey of 57 NBFCs and analysed the financial statements of many of the non-bank lenders, such lenders managed to grow despite challenging market conditions. Private equity investors, who have a longer-term investment horizon, have continued to show strong interest in funding NBFCs throughout this crisis, he said.

“These companies are expected to continue to experience quite strong growth in the next year given their solid business fundamentals and the massive market opportunity. For most of them, the worst is behind," he said.

The survey showed that 78% of these non-banks have been able to raise equity although their median borrowing cost increased around 100 basis points. Also, most non-bank lenders hold at least 2-3 months of liquidity, compared to one month before the liquidity crisis. Over the last few months, the government and the central bank have taken steps to improve access to funds for non-bank lenders and housing finance companies.

According to an analysis of non-bank lenders shared by Fitch Ratings, non-bank lenders and housing financiers have managed to step up their market share to 23% in FY19 from 20% in FY15 as these entities have leveraged better distribution channels for rural and semi-urban retail customers who are under-served by banks. Recently, large NBFCs have increased their bank funding, benefitting from various government initiatives to support the funding needs of the sector.

According to Karthik Srinivasan, senior-president and group head of financial sector ratings at ICRA, market condition has improved recently. “Things are better than what it was a couple of quarters ago and it has taken some time for the liquidity situation to ease," he said. While some NBFCs are getting access to funds, some others are not getting adequate funds at a competitive interest rate. “Lenders are a bit cautious before extending credit. The focus has shifted from growth to managing the liability side," he said. While the government has been taking steps, it is ultimately about the risk appetite of the lending banks, he said.

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