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Non-banking Finance Companies (NBFCs - excluding NBFC-MFIs) are likely to witness an increase in the 90+ day delinquencies, by about 20-50 bps, from the levels of about 4.9 percent as on June 30, 2017.
While some key asset classes like loan against property (LAP) would register an increase in delinquencies, others like tractors and construction equipment are likely to see some reduction from their peaks. Commercial vehicles (CVs), passenger vehicles (PVs), gold etc are likely to register moderate increase or would remain range-bound, depending on the extent of improvement in demand and operating conditions.
"The GST implementation is likely to have a transitional impact on small businesses and self-employed borrowers, the key target segments of NBFCs. Demonitisation hangover coupled with the slowdown in business on account of GST during Q1 FY2018 weighed on the growth prospects. Credit growth is expected to remain moderate in Q2 FY2018 too but is expected to pick up in H2 FY2018 as the tax regime slowly stabilises.
We expect overall credit growth of about 16-18 percent for FY2018 for retail NBFCs," said senior vice president and group head, Financial Sector Ratings, ICRA Limited, Rohit Inamdar.
As on June 30, 2017, the total managed retail credit of NBFCs stood at ~Rs. 6.4 trillion (up from Rs 6.3 trillion in March 2017) and grew by about 15 percent over June 30, 2016 (as against ~16 percent in FY2017 and ~21 percent in FY2016). The microfinance and the LAP segment continued to record moderate growth compared to historical trends, while performance of most of other asset segments (CVs, PVs, two and three-wheelers and tractors) remained largely range-bound.
NBFC credit costs and operating costs are expected to remain higher than the past, which would offset the benefits of the lower cost of funds. Net profitability, therefore, is expected to remain at about 1.6-1.8 percent in FY2018. "The 12-month average cost of funds stood at about 9.4 percent in June 2017 compared with 9.7 percent in March 2017 and ~10.3 percent in March 2016. However, higher credit cost because of the increase in delinquencies and transition to the 90+day NPA recognition norm and the moderation in operating efficiency as growth slowed, would continue to exert pressure on net profitability of the entities," Inamdar reiterated.
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