Cyclical pressure on NBFCs to ease in H2 of FY15:India Ratings

Rating agency India Ratings today said factors like higher industrial growth and clearance of stalled projects are likely to reduce cyclical pressure on major non-bank finance companies from the second half of the next fiscal.
The rating agency's conclusions were based on stress test it conducted on eight major NBFCs- Mahindra Finance, Shriram Transport, Sundaram Finance, Cholamandalam Investment and Finance, Tata Motors Finance, Religare Finvest, Magma Fincorp and Shriram City Union Finance.
Out of the eight NBFCs, six are being rated by India Ratings.
India Ratings estimates the gross non-performing loan ratio of the eight NBFCs to reach 4.2 per cent by the end of March 2015 from 2.53 per cent during the end of fiscal year ended March 2013. For the current fiscal, it expects the gross NPL ratio to reach 3.90 per cent.

The agency has also maintained a stable outlook on the eight major NBFCs sector in FY15.
"The reason we have a stable outlook is because we expect IIP growth to pick in Q2 FY15 and also see stalled projects being cleared going forward. This shows bottoming out occurring from the second half," the agency's Director, Finance, Ehsan Syed, told reporters here.

India Ratings expects factory output to grow at 4.1 per cent in 2014-15.
New business growth, however, will likely to remain subdued till third quarter of FY15, as it would require a longer period of sustained growth in the index of industrial production to entice operators to buy new vehicles, it said.

The agency expects the credit costs of NBFCs to reach 2.3 per cent of loans in FY15 from 1.82 per cent in FY13 but will be well covered by the pre-provision operating profit of 6.17 per cent.
"However, if the collateral values were to decline sharply and the industrial/economic growth does not pick up as envisaged, the credit costs could spike and impact NBFCs with high unseasoned portfolios in particular, though this is not Ind-Ra's base case," the rating agency said.
The rising credit and funding costs will impact NBFCs' profitability, but it will still remain adequate. It expects return on assets of 2.20 per cent in FY15 and return on equity of 15.60 per cent, according to India Ratings.

The agency said the moderate loan growth witnessed in the first half of FY14 at the eight NBFCs to continue and management focus to shift more on improving recoveries and collection efficiency, and control operating costs.