NBFC Growth May Fall To Decade-Low In FY20, Says Crisil

Loan growth by non-banking financial companies may fall to a decade low of 6 to 8 percent in the current financial year compared to 15 percent last year, according to Crisil Ratings.

The collapse of the Infrastructure Leasing and Financial Services Group in September 2018 has made NBFCs rethink their business models and adapt, both their borrowing and lending strategies, to tighter liquidity conditions, the rating agency said in a Dec. 11 report on NBFCs.

As of FY19, the total credit market stood at Rs 129 lakh crore, of which NBFCs provided Rs 24 lakh crore worth of credit. As a result of the slowdown in lending, the share of NBFCs in the overall credit market could drop by 1 percent over the next two fiscals, from 18 percent at present, it added.

AUM growth for NBFCs is expected to recover to 8 to 10 percent between FY20 and FY22, CRISIL said. This growth, however, would still be lower than in the past.

The sector continues to be split down the middle with NBFCs with strong parentage raising a bulk of the fresh funds at rates far lower than others.

“Non-banks with strong parentage, that account for 70 percent of the sectoral AUM, have been less impacted on the funding front. They are likely to drive sectoral growth over the medium term,” said Gurpreet Chhatwal, president, Crisil Ratings.

For standalone NBFCs, funding access will be determined by the asset classes they operate. Pure retail NBFCs are relatively better-off and will find it easier to raise funds at reasonable costs and continue to grow. “However, wholesale-oriented ones, primarily, real estate developer financing and structured credit, remain affected more in terms of access to funds,” Crisil said.

Shifting Business Strategy

NBFCs have had to adapt to the changing environment, in terms of accessing new sources of funds such as external commercial borrowings, retail bonds and loan securitisation and de-risking their lending book.

Wholesale NBFCs, in the real-estate financing and structured finance space, are awaiting repayments on their current exposures while they go slow on any fresh funding, according to Krishnan Sitaraman, senior director, Crisil Ratings.

As a result, on-balance exposures of real-estate focused NBFCs will come down over the medium term as some of these NBFCs will also attempt sell these loans to other platforms such as alternative investment funds or in the form of securitisation, he added. “The AIF structure is ideal as asset-liability issues will not crop up there and investors have a longer-term horizon which will enable customised repayment schedules for the underlying developers,” Sitaraman explained.

Wholesale securitisation is still at a nascent stage, but Sitarman said there is room for growth.

Asset Quality Issues

Delinquencies, Crisil said, are expected to inch up going forward.

For retail loans such as home loans and vehicle finance, which together account for more than half of the overall sectoral AUM, delinquencies are expected to rise marginally. Whereas in the real estate and structured credit space, delinquencies are likely to increase sharply, the report said.

“The real estate sector is experiencing significant headwinds while the financial flexibility of many underlying operating companies in the structured debt space has been impacted due to the overall slowdown in their business,” it added.

Sitaraman explained that around half of all NBFC real-estate developer loans are presently under moratorium, which means that developers only need to service the interest portion of the loan. Once the moratorium lapses, asset quality risks could rise.

“As of September 2019, the reported NPA ratio for the segment is around 3.3 percent. Our estimate is that the NPAs [for project-finance loans] could probably be three times higher, but this is based on certain assumptions. We don't expect NPAs to be significant in lease rental discounting as it is relatively safer,” Sitaraman added.