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Mumbai: The asset quality of non-banking financial companies (NBFCs) continued to deteriorate in the first half of fiscal year 2020, while profitability improved, showed the Reserve Bank of India’s (RBI’s) report on trends and progress in banking.

The proportion of doubtful assets showed a marginal increase in this period from 2% to 2.3% of total assets, RBI said. Doubtful assets are those that have remained non-performing assets (NPA) for more than two years. However, sub-standard assets, classified as NPA for not more than two years, remained unchanged.

The gross NPA ratio of non-deposit taking-systematically important NBFCs (NBFC-ND-SI) rose, while that of deposit-taking NBFCs fell in the first half of FY20, according to the report.

The gross NPA (GNPA) of NBFCs increased from 5.3% in the previous year to 6.1% in fiscal year 2018-19.

Under NBFC-ND-SI, GNPA deteriorated across all categories except NBFC-MFIs, which reported significant improvement in GNPA ratio. “The improvement in the GNPA ratio of the NBFC-MFIs may be attributed to write offs of aging loans," said the report.

For housing finance companies (HFCs), asset quality stabilized in 2018-19 after deterioration in the previous year. The consolidated balance sheet of HFCs showed reasonable expansion in FY19, though considerably lower than in the previous fiscal year on account of moderation in credit and investment growth, according to the report.

Profitability showed an improvement for both NBFC-ND-SI and NBFC-D till September 2019.

Lending activities of NBFCs-ND-SI and HFCs have somewhat moderated, while their loan-loss provisions remain at comfortable levels, the report said. Total NBFC credit grew by 18% to 23.54 trillion at the end of September, compared to 22.76 trillion in the year-ago period. Industry continued to be the largest recipient of credit provided by the NBFC sector, followed by retail loans and services. Credit to industry and services were subdued in relation to the year earlier. However, growth in retail loans continued its momentum.

The NBFC sector grew in balancesheet size to 30.9 trillion in 2018-19 from 26.2 trillion in 2017-18, according to the report. The pace of expansion was lower than in the previous year, primarily because of rating downgrades and liquidity stress faced by a few large NBFCs in the aftermath of the Infrastructure Leasing and Financial Services crisis. The NBFCs ND-SI category experienced a slowdown, though NBFCs-D broadly maintained their pace of growth.

However, in the first half of this fiscal year, growth in balancesheet size of NBFCs-ND-SI and NBFCs-D moderated because of a sharp deceleration in credit growth.

NBFCs continued to rely on bank borrowing, while finding it difficult to raise funds through debentures. The share of bank borrowing increased from 21.7% in the previous year to 27.2% of total borrowing in FY19.

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