India Ratings' stable outlook for NBFCs

India Ratings has maintained a stable outlook on the major non-bank financial companies (NBFCs) sector for the calendar year 2013.

India ratings said major NBFCs’ robust pre-provisioning profits (gross profits) provides a strong cushion against rising credit costs and elevated funding costs and there will be only limited impact of proposed regulatory changes on these companies and in the long term will strengthen the sector.

Reserve Bank of India (RBI) on the basis of working group constituted under former deputy governor of RBI, Usha Thorat, had put out the draft norms for all the NBFCs.

Major recommendations in the draft norm include increasing Tier-I capital from 7.5 per cent to 10 per cent and reduce asset classification norms from current 180 days to 90 days, like the banks.

However, NBFCs have made a representation to the central bank to continue with the old norms.

The financial impact of the proposed revisions in asset classification, provisioning norms and tighter liquidity requirements will be manageable, India Ratings said.

“Interest rate softening environment will have limited impact on NBFCs cost of funds due to regulatory changes of last two years, which are increasing borrowing costs” said Ehsan Syed, director, financial institutions, India Ratings.

“There is pressure on heavy and medium commercial vehicles segment, as industrial activity will be muted and margins of truck operators would shrink as they may not be able to pass on the full impact of diesel price deregulation to their customers, which will create asset quality pressure for NBFCs” Syed added.

CVs form a major chunk of NBFCs total assets.

Rating agency expects return on assets (ROA) for NBFCs to range between 2.3-2.5 per cent in 2013-14.

India Ratings further added NBFCs’ dependence on the banks could increase in 2013 on account of the 30 per cent sectoral cap on mutual funds debt investments. Though interest rates soften this year cost of funds will remain elevated bank loans to NBFCs no more classify as priority sector for the banks and the net interest margin is estimated to drop to 5.9 per cent from 6.1 per cent last year.

There could be consolidation in smaller NBFCs as the draft norms require deregistration of NBFCs below the asset base of Rs 25 crore.

India Ratings have covered eight major NBFCs for this report which are Shriram Transport Finance, Mahindra Finance, Sundaram Finance, Cholamandalam Investment and Finance, Religare Finvest Limited and Shriram City Union Finance.