NBFC funding to rise over total net worth of small business loans: Icra

An equity capital of Rs 2,000 crore raised, says ratings agency

Non-bank finance companies (NBFCs), focused on small business loans (SBL), have raised an equity capital of around Rs 2,000 crore, said ratings agency Icra.

This is more than the combined net worth of these entities as on March 31, 2017 and around 1.5 times the total capital raised by them over the last three financial years, said the report. The report has sampled 10 SBL-NBFCs, including three financial technology companies.

The strong investor interest is expected to increase portfolio by six times to Rs 23,000 crore by March 2020.  The sample SBL-NBFCs’ portfolio grew by nearly four times to Rs. 3,700 crore between April 2015 and March 2017.

The share of unsecured loans in total portfolio, especially for fintech companies, was on the rise. The share of portfolio with mortgage security reduced from around 66 per cent in March 2015 to about 58 per cent in March 2017.

The increase in portfolio and the rising proportion of unsecured loans is likely to result in a further rise in delinquency rates for these entities. Icra believes that delinquencies of dues over 90 days for SBL-NBFCs are likely to increase to 3.3-3.8 per cent by March 2020, as portfolio seasons. This figure has increased steadily over the last three years to 2.8 per cent as on March 31, 2017. However, it remains lower than that of the overall NBFC-retail segment, excluding microfinance institutions, which was 5 per cent in March 2017.

“Sizeable equity infusion, healthy business yields and an expected moderation in cost of funds are expected to support the profitability of the entities going forward. However, improving operating efficiencies and keeping credit costs at reasonable levels would be the key drivers of profitability,” said Kartik Srinivasan, Senior Vice President and Group Head, Financial Sector Ratings, Icra.

The ratings agency said that SBL-NBFCs need to augment their senior and middle management teams and, improve their internal control and monitoring processes to make them commensurate to manage a larger portfolio base as well as strengthen the information technology and management information systems.