India Ratings and Research (Ind-Ra) has revised its sector outlook on non-banking finance companies (NBFCs) to negative from stable. The agency has maintained its negative outlook on large ticket housing finance companies (HFCs). Ind-Ra expects structured finance (SF) rated transactions to remain stable in the second half of FY20, on account of cherry-picked loans, significant amortisation, minimum utilisation of credit enhancement and the consistently robust performance of underlying retail and commercial loan assets when compared to overall industry trends.
Ind-Ra has cut its growth forecast for NBFCs for FY20 to
10-12% from 15% 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. Ind-Ra
expects the overall profitability to moderate across the industry, as the rise
in funding cost and falling lending opportunities would lead to increased margin
pressure. The ability to partially pass on the increase in funding cost to
retail borrowers also remains constrained due to subdued demand.
Most NBFCs have been facing funding challenges post the credit crisis in September 2018, and though the funding costs have softened, they 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. NBFCs with strong credit profiles have been better equipped to tackle these challenges, enabling them to gain market share from other NBFCs.
The balance sheets of many systemically important NBFCs are larger than those of mid-sized banks, with significant funding requirements. Furthermore, as NBFCs are primarily wholesale funded institutions, they need to plan their liquidity far more prudently, given that they do not have access to the lender of last resort, unlike banks. Ind-Ra opines that the NBFCs that are facing funding challenges will get into a co-origination model with banks and would endeavour 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. However, wholesale and semi-wholesale NBFCs in real estate, corporate lending and large ticket housing segment have seen challenges in mobilising liabilities, largely because of the asset-side perception risk arising from the slowdown in real estate and moderation in refinancing opportunities.
Within asset classes, Ind-Ra has maintained a stable-to-negative outlook on commercial vehicle loans, as the economic slowdown has led to a moderation in load availability. The agency has also maintained its stable-to-negative outlook on tractor loans due to moderation in food inflation, offtake of produce below minimum support price, and rise in input costs. Ind-Ra has a negative outlook for the large ticket housing sector due to funding challenges and rising inventory levels. The loans against property (LAP) segment has been under pressure because of the cash flow pressure plaguing the SME segment, which is the dominant market for LAP. Ind-Ra expects delinquency levels of pools to consolidate at current levels or inch up moderately in FY20. Despite the ongoing economic slowdown, the agency expects the performance of loans extended by microfinance institutions to remain stable, as the payments are granular and more frequent.
Additional information is available at www.indiaratings.co.in.
Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.