Asset quality stress on NBFCs may ease in 2nd half of FY16

Asset quality stress on NBFCs is likely to recede in second half of FY16 as repayment capacity of borrowers is likely to improve on economic recovery, India Ratings said today.
The agency said asset quality stress will start receding in second half FY16 as excess capacity of commercial assets gets absorbed on back of strengthened manufacturing activity.
However, the recovery will be gradual and ratio of delinquent loans is expected to remain elevated with gross non-performing loans to be seen at 5.5 per cent in FY16.
"While borrowers of large CVs (commercial vehicles) are likely to have a stronger credit profile given that the equity down payment could be substantial, LCVs (light commercial vehicles) are likely to have more small borrowers," India Ratings & Research (Ind-Ra) said in 'FY16 Outlook: Non-Bank Finance Companies'.

The capacity utilisation of CVs, commerical equipment is expected to improve in FY16 on higher manufacturing activity on higher manufacturing activity and revial of overall economic activity.
It said capex revival through fresh investments, removal of bottlenecks and lifting of mining ban will increase load availability and boost CV industry.

The sharp drop in CV sales in 2013 and 2014 has self adjusted capacity to a certain extent as the replacement demand for new CVs is now closer to new medium and heavy commercial vehicles (MHCVs) sales, it said.
"As commercial assets cash flow improves, fresh non-performing loans accretion is likely to slow down," said the ratings agency.

Further, it expects NBFCs to increase their market borrowings in FY16 as spread between bank borrowings and market borrowings remain wide at 100-150 basis points (one basis point is one hundredth of a percentage).
It expects Reserve Bank to ease rates by 75 bps (basis points) in FY16 that will limit banks to pass on rate cuts.
"NBFCs' market share in system credit is likely to continue to expand. As the economy recovers, credit demand will rise.
"A part of the (banks') credit is likely to move to NBFCs, especially in the segments where NBFCs have expertise --small & medium enterprise, loan against property, structured credit and small & medium ticket home loans-- said the report further.

India Ratings has assigned a stable outlook to the domestic NBFC industry.