India Ratings and Research (Ind-Ra) has reportedly maintained a firm outlook on the retail NBFC sector and an unsteady one for wholesale NBFCs. This is specifically for lenders to real estate players and large ticket housing.
As per speculation, NBFCs to witness margin pressures in FY20. Through the years, NBFCs have increased dependency on short-term borrowings, while decreasing on-balance sheet liquidity. This was done to sustain profitability, which had been staggering under the pressure of higher credit cost and falling yields. This recent liquidity crisis has given rise to barriers in funding.
It may prompt NBFCs to revamp their balance sheets partially and replace short-term borrowings with long-term funds. Rise in funding cost may be passed on but Ind-Ra believes retail NBFCs rank higher than wholesale NBFCs. Housing finance companies will contract in their margins in the large ticket housing segment. The margin pressure had been balanced out through higher yields on non-housing loan books. But this segment is likely to face growth-related issues in FY20.
Ind-Ra believes NBFCs may have an unenthusiastic growth performance in FY20 due to a looser grip in segments such as auto and real estate. The current capital has lessened and internal accruals are estimated to be enough to take care of the growth requirements. Ind-Ra’s has also conducted a stress test for the higher-rated NBFCs. They show reasonable elasticity in the event of short-term liquidity tightness and a hike in delinquencies. The stress case equity buffers would still remain stable in this scenario.
Ind-Ra has added that the performance of collateral-backed MSME loans may continue to deteriorate. This could lead to the outlook for the segment being revised to negative from stable-to-negative. The lenders are in a tussle with moderation in real estate prices. It has resulted in lower balance transfers and less-than-expected recoveries for repossessed assets. Lenders have also been relying too much on collateral comfort rather than business cash flows of prospective borrowers. This has further worsened during demonetisation and formalisation of income post GST implementation. The is also the reason for continuing defaults.
For tractor loans may not have any further improvement in delinquencies in the near term, as the borrowers continue to struggle with less-than-normal monsoons and falling agricultural prices. This could be evident from lower food inflation. The past years have seen an increase in fuel prices and asset quality in the commercial vehicles (CV) segment did not deteriorate.
The asset quality for CVs may not deteriorate in FY20 because of adequate fleet utilisation for lower tonnage vehicles. CV sales may remain muted amidst sufficient system capacity. For micro finance, NBFCs, loan collection and delinquency performance may return to and remain at the pre-demonetisation levels. But, the NBFCs would exercise caution while venturing into new geographies. Wholesale NBFCs, mostly financing real estate developers, could face increase credit cost pressures due to a slowdown in the real estate sector and lower refinancing in the aftermath of a weak system-wide liquidity.
