Ind-Ra revises FY20 outlook on NBFCs to negative from stable

India Ratings and Research (Ind-Ra) has revised its FY20 outlook on non-banking finance companies (NBFCs) to negative from stable and also maintained its negative outlook on large ticket housing finance companies (HFCs). It expects structured finance (SF) rated transactions to remain stable in the second half of FY20, on the back of cherry-picked loans, significant amortisation, minimum utilisation of credit enhancement and the consistently robust performance of underlying retail and commercial loan assets when compared to overall industry trends.

Besides, rating agency has cut its FY20 growth forecast for NBFCs to 10-12 percent from the earlier estimate of 15 percent, citing reasons like funding challenges and slowdown in economic activity, which is evident from the fall in vehicle sales, slowdown in rural infra activity, and challenges to small and medium enterprises (SME). It expects the overall profitability to moderate across the industry, as the rise in funding cost and falling lending opportunities would lead to increased margin pressure. It added that the ability to partially pass on the increase in funding cost to retail borrowers also remains constrained due to subdued demand.

Ind-Ra further said that most NBFCs have been facing funding challenges post the credit crisis in September 2018, and though the funding costs have softened, they remain higher than the costs prevailing a year ago. It noted that NBFCs have been grappling with a double whammy, with the funding tightness being accompanied by possible asset-side headwinds in light of slowing demand. According to India Ratings, during this period, NBFCs also had to increasingly rely on alternate measures to generate liquidity, including asset sales and securitization and direct assignments of loans. It added that NBFCs with strong credit profiles have been better equipped to tackle challenges facing the sector, enabling them to gain market share.