Currency crunch to impact near term business growth, asset quality of retail NBFCs: ICRA

Credit rating agency ICRA on Thursday revised its portfolio growth outlook for FY2017 to 17 to 19 percent vis-a- vis the previous estimate of 19 to 22 percent as retail credit off-take has been impacted post demonetization.

"The key target segment of NBFCs, which are the self-employed, is likely to have been impacted more, as a sizeable share of their business is based on cash transactions, which were affected by the shortage in currency following demonetisation," said senior vice president and group head financial sector ratings ICRA, Rohit Inamdar.

"NBFC business has also been affected by the moderation is disbursements with limited cash availability (especially microfinance and gold backed lending). The NBFCs are also expected to focus more on collections than on incremental business," added Rohit.

Competitive pressures for retail-focused NBFCs to intensify as banks are increasingly focusing on retail segment to offset the weak corporate credit growth. "Further, increase in the bank deposit base post demonetisation and steep reduction in lending rates is expected to result in migration of some large-ticket and relatively better quality NBFC borrowers to banks," he added.

Overall delinquencies, especially in the softer buckets, are expected to increase in the near term as demonetisation impacted collections across asset classes. The extent of impact in each asset class however has varied. With not being allowed to accept repayments in old currency, shortage of valid currency among borrowers, and disruption in borrowers' regular business, especially the cash-intensive ones, resulted in a dip in collection efficiency across lenders.

The performance of the affected asset classes going ahead will depend primarily on the pace of restoration of currency supply in the system and the degree of impact of demonetisation on the borrower business volumes and cash-flows.

As on September 30, 2016, the total managed retail credit (including off balance sheet book) of NBFCs stood at Rs. 5.4 trillion and grew Y-o-Y by about 20 percent in H1FY2017 (as against 19.9 percent in FY2016 and 14.8 percent in FY2015). The total NBFC retail credit including SME credit stood at about Rs.6.0 trillion as on September 30, 2016 and grew Y-o-Y by about 22 percent in H1FY2017.

Some moderation in business growth, higher competitive pressures, fall in operating efficiencies because of increased focus on collections and, higher credit cost would partly offset the benefit of lower cost of funding. NBFC net profitability (Return on average managed asset) is expected to be in the range of about 1.6-1.8 percent for FY2017, says ICRA in the report.