Owing to improved asset quality, increasing net interest margins and higher operational efficiency, non-banking financial companies (NBFCs) are well poised to match banks’ non-mortgage or unsecured retail lending portfolio in a couple of years.
These rated finance companies focus on vehicle finance, personal loans, gold loans and SME finance. However, they are not into home financing.
According to a report by rating agency Crisil, the retail loan portfolio of NBFCs is estimated to cross Rs 4 lakh crore by March 31, 2013. Semi-urban and rural areas account for 60 per cent of NBFCs’ loan portfolio. The absolute portfolio in these areas is higher than the outstanding retail loans of banks.
“The recent trend of strong growth and improving asset quality and profitability are likely to continue, strengthening the credit risk profiles of NBFCs over the medium term,” Crisil said in a release.
The report says the gross non-performing assets of NBFCs, at 3.5 per cent as on March 31, 2010, are expected to decline by 125 basis points to 2.25 per cent by March 31, 2013. NPA coverage is 17 times for NBFCs, higher than the 10 times in the case of banks.
Backed by decline in credit costs and improving operating efficiencies, the rating agency expects the profitability margins of NBFCs to touch 2.9 per cent during 2011-12, highest in the last five years.
“With their keen understanding of customer needs, NBFCs remain focused on product innovation and customisation — factors that will help them gain an edge over banks while maintaining their niche positioning. NBFCs can, therefore, double their loan portfolio, and even match the market share of banks in the non-mortgage retail finance space by March 2013.” said Kudva, MD & CEO, Crisil.
The improvement in asset quality would be driven by a structural shift in asset composition towards secured asset classes, stronger underwriting norms and monitoring mechanisms, and a favorable business environment, the report said.
However, the key challenge for the sector would be adapting to the changing regulatory regime, which is expected to become more stringent.
“Competition in the NBFC sector will also intensify and players will need to diversify their resource profiles, maintain competitive borrowing costs, and ensure availability of skilled human resources to maintain growth,” the report added.
Recently, the Reserve Bank of India formed a working group under former deputy governor Usha Thorat to examine regulatory issues concerning NFBCs.
The working group would deal with issues concerning the definition and classification of NBFCs, regulatory gaps and arbitrage, maintaining standards of governance and appropriate approach to NBFC supervision.