Asset quality pressure in retail NBFCs to stabilise only later this year: ICRA

These NBFCs continue to face a challenging period of subdued growth and build-up in delinquencies in first quarter of FY15

Asset quality pressures for retail non-banking finance companies (NBFCs) are expected to stabilise only in the latter part of the second half of the financial year (October 2014-March 2015). However, some revival in growth is expected in 2015-16, said rating agency Icra.

“Retail-focused NBFCs continue to witness a challenging period of subdued growth and build-up in delinquencies in the first quarter of FY15, as a result of weakness in the economic and business outlook witnessed in 2013-14,” said its report.

The strong verdict in the Lok Sabha elections had led to an improvement in sentiment, fuelled by expectations of speedy decision making and investor-friendly reforms. Against this backdrop, ICRA expects the growth rate of gross domestic product for 2014-15 to improve to 5.3-5.5 per cent against the 4.7 per cent in 2013-14, which should result in a pick-up of credit demand. “As a result, NBFCs could see some revival in growth in FY15 to 11-14 per cent from about eight per cent in FY14, although expected largely during the latter half of the year,” said Icra.

Recently, banks returned to focus on retail lending, as credit demand from companies remains weak. Icra believes NBFCs will need to manage competitive pressures from banks. “NBFCs’ niche positioning, good market knowledge and large customer outreach (will) continue to support their access to customers. Further, the Reserve Bank’s regulations of June 26, permitting non-deposit accepting NBFCs to act as business correspondents could enhance NBFCs’ position as a conduit for banks to meet priority sector lending requirements and support the non-interest income of NBFCs,” said Icra.

Due to rising credit costs, NBFC earnings saw a compression in the first quarter of the current financial year, on the back of rising credit costs. According to Icra, this is expected to remain at an elevated level in FY15, until asset quality challenges unwind. Further, cautious growth and likely costs associated with recovery efforts could result in some weakening in operating efficiencies for NBFCs, its report said.