India Ratings & Research (Ind-Ra) has maintained a stable outlook on the non-bank finance company (NBFC) sector as well as companies for FY16. The agency believes asset quality stress will start receding in 2HFY16 as the excess capacity of commercial assets gets absorbed on the back of strengthened manufacturing activity.
The recovery, however, will be gradual and the ratio of delinquent loans will remain elevated (gross non-performing loans: 5.5% in FY16). NBFCs recognising NPLs on 150 days past due (dpd) in FY16 (to be transited to 90dpd by FY18) from the current 180dpd will also keep the ratio elevated. The high current stock of NPLs together with this transition will keep the credit costs high in FY16.
Ind-Ra expects the process of structural shift in the commercial vehicles (CV) industry towards the higher tonnage heavy CV segment and light CV segment (LCV) from the intermediate and medium segment will continue as the road infrastructure strengthens further. While the borrowers of large CVs are likely to have a stronger credit profile given that the equity down payment could be substantial, LCVs are likely to have more small borrowers. This will also lead to a similar shift in customer profile for NBFCs. The heavier tonnage borrower category will migrate further towards banks while NBFCs will have a larger market share in LCVs. Used CVs borrowers’ profiles of NBFCs will also witness some transition as the ticket size and consequently equity down payment, even for used vehicles in the high tonnage segment is likely to be significant. The used LCV segment will continue to be largely catered to by the unorganised players.
NBFCs will increase their market borrowings in FY16 as the spread between bank borrowings and market borrowings remains wide (100bp-150bp). While Ind-Ra expects the Reserve Bank of India to ease rates by 75bp in FY16 (please refer Industrial Revival to Push Economic Growth in FY16), the agency’s research shows limited ability of banks to pass on the rate cuts due to their liability structure. NBFCs will also increase the proportion of long-term market borrowings in the funding mix to lock in the moderate rates and low-term premium, further strengthening their liquidity. Off balance sheet funding should see moderation on account of sizeable amount of rural infrastructure development fund (RIDF) deposits with the banks (FY14: Rs 1.4 trillion). The revised guidelines on RIDF deposits by banks make them eligible for priority sector classification till their maturity as against the earlier eligibility for only the year of investment, reducing banks' appetite for these assets.
Capitalisation buffers are likely to remain comfortable for NBFCs in FY16, aided by lower loan growth which can largely be supported by internal accruals. The new regulatory guidelines requiring transition to minimum Tier 1 Capital of 10% by FY17 are unlikely to impact most of the large NBFCs rated by Ind-Ra as they operate with sufficient buffers over the minimum prescribed ratio.
NBFCs' market share in system credit is likely to continue to expand. As the economy recovers, credit demand will rise. However, the banking system may not be able to cater to this demand given its capital constraints (higher capital provisioning requirement under Basel III). A part of the credit is likely to move to NBFCs, especially in the segments where NBFCs have expertise (small & medium enterprise, loan against property, structured credit and small & medium ticket home loans).
