Are India’s Government-Owned Nonbank Financial Institutions Set for Remarkable Growth?

New Delhi, May 26 (NationPress) Government-owned nonbank financial institutions in India are poised to capture a greater share of the market over the next year or two, as they are integral to fostering economic development in line with the country's official policies, according to a report from S&P Global published on Monday.

“Financial services is recognized as one of the four strategic sectors within India. Consequently, Government-Related Entities (GREs) in this sector are expected to receive significant government backing,” stated S&P Global Ratings credit analyst Deepali Seth-Chhabria.

“This is especially true for entities that fulfill policy roles. We believe that connections to the government provide financial agility, access to more affordable funding, and a framework for asset quality support,” she elaborated.

GREs are predominant in India's financial landscape. Numerous nonbank GREs function in areas of national significance. The growth of loans for financial GREs is projected to hover around 15 percent annually for the next two years, bolstered by mandates aimed at advancing strategic sectors, as highlighted in the S&P report titled 'Indian Government-Owned Financial Institutions: In The Fast Lane.'

Entities like the National Bank for Financing Infrastructure and Development (NaBFID; unrated) and the Indian Renewable Energy Development Agency Ltd are anticipated to experience even higher growth, as they expand their operations from a modest starting point, as per the report.

“The quality of assets presents a varied picture. Some nonbank financial institutions face challenges with weak borrowers, although sovereign backing and guarantees from the government help alleviate the risk,” commented S&P Global Ratings credit analyst Geeta Chugh.

“Credit costs in the sector have improved and are more favorable compared to peers. However, we foresee an uptick in credit costs as loans mature, recoveries decline, and the benefits from surplus provisions created in previous years diminish.”

Earnings for development financial institutions, including those catering to small industries (SIDBI), agriculture (NABARD), and housing (NHB), remain moderate. The same applies to the two financial GREs in India that we assess, Indian Railway Finance Corp. and the Export-Import Bank of India.

These organizations often operate with narrow margins, even with their lower funding costs. Margins are restricted due to their policy roles. Some entities work on a cost-plus basis, while others have limits on lending margins for their refinancing operations, as noted in the report.

In contrast, Power Finance Corporation, REC Ltd., and IREDA achieve higher margins since they lend to relatively riskier borrowers, the report indicated.