NBFCs and HFCs to face growth headwinds along with continued funding challenges

India Ratings and Research (Ind-Ra) on Monday revised its sector outlook on non-banking finance companies (NBFCs) to negative from stable and maintained its negative outlook on large ticket housing finance companies (HFCs).

It expects structured finance rated transactions to remain stable in the second half of FY20 on account of cherry-picked loans, significant amortisation, minimum utilisation of credit enhancement and the consistently robust performance of underlying retail and commercial loan assets when compared to overall industry trends.

Ind-Ra cut its growth forecast for NBFCs for FY20 to 10 to 12 per cent from 15 per cent in view of the funding challenges and slowdown in economic activity which is evident from the fall in auto sales, the slowdown in rural infra activity and small and medium enterprises (SME) challenges.

Ind-Ra said it expects the overall profitability to moderate across the industry as the rise in funding cost and falling lending opportunities will lead to increased margin pressure. The ability to partially pass on the increase in funding cost to retail borrowers also remains constrained due to subdued demand.

Most NBFCs have been facing funding challenges post the credit crisis in September 2018. Though funding costs have softened, they remain higher than the costs prevailing a year ago. With the funding tightness being accompanied by possible asset-side headwinds in light of slowing demand, NBFCs have been grappling with a double whammy.

During this period, NBFCs also had to increasingly rely on alternate measures to generate liquidity including through asset sales-securitization and direct assignments of loans. NBFCs with strong credit profiles have been better equipped to tackle these challenges, enabling them to gain market share from other NBFCs.

Within asset classes, Ind-Ra has maintained a stable-to-negative outlook on commercial vehicle loans as the economic slowdown has led to a moderation in load availability. The agency has also maintained its stable-to-negative outlook on tractor loans due to moderation in food inflation, offtake of produce below minimum support price, and rise in input costs.

Ind-Ra has a negative outlook for the large ticket housing sector due to funding challenges and rising inventory levels. But despite the ongoing economic slowdown, the agency expects the performance of loans extended by microfinance institutions to remain stable as the payments are granular and more frequent.

The government has announced a slew of measures to support the NBFC sector like increasing the ticket size to be included in the priority sector status for onward lending to low ticket housing and micro SME loans, partial credit guarantee for securitisation transactions, and allowing companies to access external commercial borrowings to repay rupee loans taken for capex or on-lending.

However, these measures will only play out over the medium-to-long term, said Ind-Ra.