NBFCs' loan share may go up 300 bps in next 3 fiscals: Crisil

The share of non-banking finance companies (NBFCs) in loans being given in the financial sector may rise by 300 basis points to 17.6 per cent over the next three fiscals and they can grow even faster as public banks adopt cautious approach on lending, according to Crisil.
The credit rating agency said in a research report today that the growth builds on top of 300 bps or 3 per cent seen in the last five years.
According to the report, NBFCs (including housing finance companies) could grow even faster as public sector banks (PSBs), facing asset quality challenges, remain circumspect on lending.

"Domestic NBFCs have leveraged their unique strengths and some of them have scaled up to become world-class institutions," Crisil Ratings Business Head (large corporates) Gurpreet Chhatwal said.
Products that constituted just 16 per cent of NBFC advances in fiscal 2012 will constitute 40 per cent by fiscal 2019. Much of the growth has emanated from mortgages and MSME financing, it said.
As for other segments, housing finance remains an outperformer. However, large NBFCs in this space have ceded market share to medium-sized rivals. Yet, overall sector-wide portfolio growth is seen steady, the report said.

"Going forward, we also see vehicle loans growth picking up and gold loans growing moderately after a lull."

The real estate lending space has seen the entry of several new players. Growth, however, is expected to be lower going ahead given the emerging risks.
The report sees risks building in the loan against property category (LAP) with the segment experiencing stronger headwinds than envisaged earlier, with competition from private banks leading to sharper and sooner-than expected yield compression.
Soft property prices could reduce the collateral cushion available in LAP portfolios, thus increasing risks if borrower cash flows are insufficient for loan servicing. As a result, as per the report, growth in this segment is expected to be lower than estimated.

In the past five years, NBFCs have raised Rs 26,000 crore
equity. A material pick-up in securitisation and new avenues such as masala bonds will further strengthen their resource profile, the Crisil report said.
Further, for NBFCs, the borrowing cost differential with banks has narrowed by around 50 bps over the past four years.
But a key challenge for NBFCs, the report said, will be to manage competition from private banks and simultaneously balance risk and profitability.
It's here that proactive investments in technology and operational innovations would help, in terms of enhancing competitiveness.
As for demonetisation, Crisil foresees the short-term impact to be manageable for the NBFCs it rates because of access to undrawn lines of credit from banks and liquid assets.

If the disruption faced by NBFCs in cash-intensive businesses prolongs beyond two months, asset quality pressures could manifest, the rating outfit said.