The agency estimates the gross NPL ratio to reach 7.8% at FYE17 (FYE16: 6.7%; September 2015: 6.0%), of which, 1.5%-1.7% is the likely impact of a shift to 120-day NPL recognition norm. NBFCs' access to cheaper funding sources and improving operating efficiencies could help them maintain adequate pre-provisioning operating profit buffers to cushion rising credit costs.
Ind-Ra expects the revival in heavy and medium commercial vehicles led by fleet operators to trickle down to small road transport operators and driver-turned-owner segments, and boost the used vehicle market. However, the small commercial vehicle market is likely to be under continued pressure, due to the persistent overcapacity in the system. NBFCs with a higher exposure to the rural economy are also likely to see increased stress, until the agricultural economy revives.
Ind-Ra expects NBFCs to continue to gain credit market share at the expense of banks, as banks struggle to raise capital for a successful transition to the Basel-III regime. This will force banks to reduce credit growth. The agency also expects retail-focused NBFCs to gradually reduce their single product concentration by diversifying into other asset classes, primarily secured in nature. Large NBFCs are likely to grow at 14% in FY17, with SME/MSME growing faster than commercial vehicles.
Housing finance companies (HFCs) with reach and/or specialisation will continue to safeguard their market shares despite increased competition from banks. The agency expects large HFCs to grow at 13%-15% while mid-sized and regional HFCs will continue to grow at 8%-10%, higher than the system average. The agency continues to maintain a negative outlook on loan against property, as delinquencies are showing a rising trend and asset prices are visibly under pressure.
Most large NBFCs continue to maintain adequate capital buffers, with Tier 1 ratios well above the 10% threshold. In view of the 90-day regulatory transition, Ind-Ra expects the net NPL/equity ratio of the sector to rise to 21% by FY17 (FY15: 11%), which will necessitate significant equity infusions in the medium term. Nevertheless, the agency believes that the ability of large NBFCs to tap the capital markets and external investors for equity is reasonable.
Ind-Ra believes the establishment of the MUDRA Bank as a refinance agency and the proposed credit guarantee fund for refinanced loans will help the NBFCs lower their credit and liquidity risks. The applicability of SARFAESI to NBFCs could support improved recoveries. While the transition to 90-day NPL recognition will have a material impact on profitability, these guidelines could also improve the eligibility of NBFCs to avail specialised banking licences.
Also Read
The proportion of bank funding to NBFCs has significantly reduced over the years (September 2015: 44%; FY12: 56%), though this remains the largest source. As regulatory changes lend greater stability to the sector, Ind-Ra believes that NBFCs will be able to attract a diverse set of lenders, which will improve their funding profile further.
OUTLOOK SENSITIVITIES
Stable Profitability and Capital Buffers: A delayed recovery in economic activity, adversely impacting NBFC's credit quality and leading to significant erosion of their profitability and capital buffers could lead to a negative sector outlook. Cash flow pressures resulting in asset liability tenor mismatches and consequent refinancing risk could also lead to negative sector outlook. Conversely, NBFC's ability to maintain robust profitability and capital buffers through-the-cycle can lead to a positive sector outlook.
Powered by Capital Market - Live News