Rating agency maintains negative outlook in NBFC sector amid headwinds

Amid multiple headwinds in terms of slower balance sheet growth and elevated slippages in the NBFC sector, India Ratings and Research has maintained a negative outlook for the non-banking financial companies (NBFC) sector in FY21. The ratings agency said that parentage-backed NBFCs would have stronger AUM (assets under management) compared to standalone shadow banks.

“NBFCs would grow their portfolio by 8-10% in FY21 driven by retail-focused NBFCs with a long track record and established franchisee,” the agency said.

In the developer segment, challenges for real estate lenders is expected to continue in FY21 as well, given the stagnation of AUM of wholesale real estate NBFCs due to factors including funding challenges and asset-side risks, said Jinay Gala, senior analyst, India Ratings and Research. “Housing disbursements have also come down. When comparing the disbursements of the top 5-6 players in Q2FY20 with Q2FY19, there is approximately 30% reduction, which impacts the cash flows of builders,” he added.

Further, having a large part of the book under moratorium could lead to a build-up of credit costs. “Real estate developers are facing a funding crunch and the offtake is still anaemic, which could pressure lenders whose large part of books are moving out of moratorium,” the firm said.

With the elongation of the project cycle over the past few years due to factors such as GST implementation, the analysts were of the view that real estate lending would be challenging through the NBFC route. “Either you need to have banks that are supporting because they have a longer tenor liability on their side or through the AIF (alternate investment fund) structure, where you have your funding through equity or debt,” they said. Delinquencies in the LAP (loans against property) segment could go up, given the cash flow challenges in the SME segment,” said Gala.

Since FY18 retail loans have been driving the growth of the sector. Retail loans grew at a rate of 12% CAGR from FY18 to H1FY20 for the top 18 NBFCs, compared to 17% from FY13 to FY18. Meanwhile, the wholesale loan growth had fallen to just 6% CAGR from FY18 to H1FY20, as against 24% CAGR from FY13 to FY17.

The agency said that the overall liquidity in the system had eased considerably post-September 2018, but access remains asymmetrical. “While the funding cost has dipped sharply for the large and sponsor-supported NBFCs, the situation remains challenging for the rest,” the agency said.

Incremental funding for the NBFCs via commercial papers and cash credit saw a decline between September 2018 to September 2019, while they tapped bank loans, external commercial borrowings, fixed deposits, non-convertible debentures (NCDs). The borrowing costs have come down but still remain elevated, as seen in the decrease in spread of NCDs of AAA-rated issuers over government securities since the IL&FS crisis.

Source: Financial Express