ICRA expects retail focused NBFCs continue to witness a challenging period of subdued growth and build-up in delinquencies in Q1-2015 as a result of weakness in economic and business outlook witnessed in 2013-14. ''The strong verdict in the parliamentary elections has led to an improvement in sentiments, fuelled by expectations of speedy decision making and investor-friendly reforms,'' it said.
Against this back drop ICRA expects the domestic GDP growth rate for 2014-15 to improve to 5.3-5.5% against 4.7% registered in 2013-14, which should result in a pickup of credit demand. As a result NBFCs could see some revival in growth in FY 2015 to 11-14% from about 8% witnessed in FY2014, although expected largely during the latter half of the year. Asset quality pressures of retail focused NBFCs however may take longer to start reversing, although a high proportion of NBFCs assets in secured lending segments could limit their lifetime losses to a manageable level.
''Over the longer term, the growth outlook for NBFCs could be more benign as credit demand pickups. At the same time NBFCs will need to manage competitive pressures from banks, which have increased their retail lending focus in light of pressure on corporate lending,'' said ICRA.
Notwithstanding the same, ICRA expects NBFCs’ niche positioning, good market knowledge and large customer outreach to continue to support their access to customers. Furthermore the RBI regulations of June 26, 2014 permitting non deposit accepting NBFCs to act as business correspondents (BC) could enhance NBFCs position as a conduit for banks to meet PSL lending requirements and support the non-interest income of NBFCs.
NBFCs earnings continue to witness a compression in Q1-2015 on the back of rising credit costs; the same is expected to remain at an elevated level in FY 2015 until asset quality challenges unwind. Furthermore cautious growth and likely costs associated with recovery efforts could result in some weakening in operating efficiencies for NBFCs. Despite these pressures, ICRA expects most NBFCs to report double digit Return on Equity (ROE) and maintain prudent capitalization levels.
''Over the medium term expected revival in growth, a supportive operating environment and a stable/ soft interest rate regime are factors which are expected to enable NBFCs to improve profitability and shareholder returns,'' it added.
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