Recently India Ratings and Research (Fitch Group) revised its outlook on non-banking finance companies (NBFCs) sector to negative from stable. Further the agency has also maintained a somewhat negative outlook when it comes to large ticket housing finance companies (HFCs). “Ind-Ra has cut its growth forecast for NBFCs for FY20 to 10-12 per cent from 15 per cent in view of the funding challenges and slowdown in economic activity, which is evident from the fall in auto sales, slowdown in rural infra activity and small and medium enterprises (SME) challenges,” said Jinay Gala, Senior Analyst, India Ratings and Research. Also, the agency expects the overall profitability to be subdued across industry on the back of increased funding cost and falling lending opportunities that would continue to impact the margins.
Further to pass the increased funding cost to retail borrowers remains difficult by low demand. As per the agency, most NBFCs has been under severe stress due to funding challenges post credit crisis in September 2018. Despite the softening of the funding costs, they still remain higher than the costs prevailing a year ago. “With the funding tightness being accompanied by possible asset-side headwinds in light of slowing demand, NBFCs have been grappling with a double whammy. During this period, NBFCs also had to increasingly rely on alternate measures to generate liquidity, including through asset sales - securitization and direct assignments of loans,” said Gala.
However, the NBFCs with strong credit profiles stands a better chance to tackle these challenges, as well as to gain market share from other NBFCs. That said, the agency believes that NBFCs that are facing funding challenges are likely to get into a co-origination model with banks to adopt a granular asset profile. “Ind-Ra believes retail asset financers with long track records have been able to mobilise funding owing to the granular nature of their loan books and the control they have exhibited in maintaining asset quality,” opined Gala.