Asset quality of retail-focused firms stay better

NBFCs are now facing increased competition from banks, who are seeing slowdown in corporate lending opportunities

Based on the Q2FY17 results announced till date, retail lending focused NBFCs (excluding MFIs) registered around 19 per cent YoY growth in assets under management (AUMs) during Q2FY17, largely in line with Icra’s expectation of a 19-22 per cent growth for FY17. Some of the key asset classes, which supported NBFC credit growth, include LAP/SME and vehicle finance. NBFCs are now facing increased competition from banks, who are seeing slowdown in corporate lending opportunities and consequently have become aggressive in asset classes and segments catered to by NBFCs. Improvement in farm sentiments and rural demand, and uptick in urban demand driven by pay revisions, as also increased thrust of the government on infrastructure development are the critical drivers for NBFC credit growth over the medium-term.

While gross NPAs at 5.6 per cent as on September 30 showed some deterioration over 4.9 per cent reported as on September 30, 2015, partly attributable to the change in NPA recognition norms, overall the asset quality of the retail focused NBFCs remain better than those reported banking system. We expect NPAs to increase further over the next 18 months as all NBFCs move to comply with the revised regulatory NPA recognition. By March 2018, NBFCs have to recognise accounts overdue for 90 days as NPA against the March 2016 norm of 150 days and March 2015 norms of 180 days. Though the credit costs will increase over the medium-term consequent to the tougher NPA recognition norms, the moderation in the forward flow of delinquencies to harder buckets across some of the key retail asset classes would help contain the impact of the same. In any case, the ability of NBFCs to maintain underwriting and credit monitoring practices amidst increasing competition will remain a key parameter for performance.

Taking advantage of the softer interest rates in the debt capital market, many NBFCs further increased their reliance on bonds and commercial papers (share of market instruments now stands at 45-47 per cent) to reduce their average cost of funds by around 30-40 bps during H1FY17, which helped them negate the pressures on lending yield on account of increasing competition. Going forward, ability to control credit costs and maintain adequate interest spreads in a competitive business environment would be crucial for incremental profitability.

Most NBFCs are adequately capitalised for around 20 per cent credit growth over the next one-two years; Icra expects the ratio of net worth to managed assets for retail-focused NBFCs to remain adequate at around 15 per cent, supported by strong accruals and ability to raise additional capital, if required, to tap the large lending potential.

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