Credit cost for Non Banking Finance Companies (NBFCs) such as Shriram Transport Finance and Sundaram Finance is likely to rise sharply in view of the persistent economic weakness, as per Indan Ratings & Research, a Fitch group company.
“Credit costs may double in the next 12 to 18 months from 2011-12 levels while gross non-performing-loans may rise to over 3% of loans from 1.9%. The spike in credit costs is likely to be prominent for companies with large unseasoned books,” said the agency in its note.
Continued sluggish industrial growth along with reduced infrastructure activity, judicial restrictions on mining activities and lower food grain output has reduced cash flow of borrowers. Freight rates have not matched the increases in diesel prices and is likely to have a lagged impact on the asset quality of NBFCs.
“The static pool data analysed by India Ratings for the rated pools demonstrate early trends of rising delinquencies across asset classes, though with varying degrees,” said the report.
The strong asset growth during 2010-11 and 2011-12 and the resulting competition for market share has led to some dilution in risk mitigation practices in some cases. Stronger borrower cash flows, a relatively lower risk appetite post 2008-09 and the denominator effect of steep loan growth in 2010-11 and 2011-12 led to credit costs declining to a four-year low in 2011-12 at only 41% of 2008-09 credit costs.
This is, however, set to rise in the current and next financial year.
