With moderation in domestic growth prospects, major Indian non-banking financial companies (NBFCs) are likely to see a drop in profitability and asset quality this year, owing to the increasing cost of funds. According to rating agency Fitch, the average return on assets is likely to fall to 1.5-2 per cent from about 2.6 per cent in the April-September period and 2.9 per cent in 2010-11.
The rating agency said non-performing loan ratios at nine major NBFCs were likely to rise to 2.5-3 per cent this year, from 2.1 per cent as on March 30, 2011. “Delinquencies are increasing in key business lines, but unless this is accompanied by sharp erosion of collateral values, the high risk-adjusted margins should be able to absorb the jump in credit costs,” Fitch said in a release.
Citing “challenges in raising cost-effective funding that may squeeze margins, impair growth prospects and increase the costs of raising fresh capital”, the rating agency maintained a “cautious” medium-term outlook for the sector. The outlook was also based on regulatory changes, which could impact funding from domestic banks, the largest source of funding since the liquidity crisis in 2008, Fitch said.
Since April 2011, the banking regulator has done away with the priority sector tag for loans extended to the NBFC sector. This has resulted in higher cost of funds for the NBFC sector.
“The alternate funding channel through bilateral assignments may also turn less attractive if RBI (Reserve Bank of India) proposes similar rules for bilateral securitisation by NBFCs, as it has proposed for banks. While a partial reinstatement of the priority sector status for lending to NBFCs has been recommended by another committee appointed by RBI, the proposal includes a margin cap for NBFCs, and this would impact profitability,” Fitch said.
The report said sectors such as heavy and medium commercial vehicle finance and commercial equipment financing were likely to be hit the most, owing to the weak economic activity.
“Other stressed asset classes, like construction equipment finance, loans against property and small business loans (at some NBFCs), would remain under stress in 2012. Fitch, however, expects light commercial vehicle (LCV) financing, a key business line of major NBFCs, to remain stable in 2012, supported by stable sales of LCVs,” the release said.