Retail credit exposure of non-banking finance companies (NBFCs) stood at Rs. 5.0 trillion as on March 31, 2016 registering an annual growth of 19.9% as against 14.8% in FY2015. The growth was supported by the revival of credit growth in the new commercial vehicle (CV) segment, passenger vehicle (PV) and gold loan segment while growth in the microfinance, mortgage and used CV segment continued to remain healthy. Credit growth in the tractor segment witnessed a sharp drop during FY2016 on account of weak monsoons and moderation in rural demand, while credit off-take in the Construction Equipment (CE) segment continued to display weakness.
“Overall, in FY2017, ICRA expects NBFC retail credit to grow by 19-22% buoyed by improving prospects of the CV segment, gold loan and passenger vehicle segments while microfinance and mortgage segments are likely to exhibit healthy double digit growth; other segments including tractors and CE could registered modest revival in the latter part of the year” says Karthik Srinivasan, Co-head Financial Sector Ratings, ICRA.
“We believe that NBFCs are expected to be faced with increased competitive pressures, as banks expanded its retail credit at a faster pace than in the past, given the pressures in the corporate segment. However, NBFCs’ niche positioning, differentiated product offering, good market knowledge and large customer outreach would continue to enable them to tap opportunities.” added Karthik Srinivasan.
NBFCs’ 90+ day delinquencies (excluding MFIs) moderated to 5.4% as on March 31, 2016 as compared to a stable level of 5.7-5.8% witnessed over the previous 2-3 quarters. Delinquencies reduced or remained largely range bound in all major asset classes barring the LAP segment, which registered a steady increase. Overall in FY2016, delinquency forward flows moderated; the above along with an expected improvement in operating environment in the current financial year, delinquencies are likely to reduce further.
The banking system remains the primary source of funding for retail-focussed NBFCs, accounting for close to 42% of the total resource profile as on March 31, 2016, with market instruments i.e., non-convertible debentures and commercial papers accounted for 34% and 11%, while securitization /assignments accounted for about 8% of the borrowings. “Given the taxation related changes and widening of the investor base, ICRA expects some renewed interest in securitisation transactions; the share of the same in the overall funding profile of NBFCs is expected to go up in the future.” says Kalpesh Gada, Senior Vice President, ICRA.
Overall, the capitalization levels of retail-focused NBFCs have remained adequate with the ratio of net worth to managed assets at ~15.4% as on March 31, 2016. Although in FY2017 credit growth could pick up pace (to 19-22%) and internal capital generation could drop to ~10%, the ratio of net worth to managed assets for retail-focused NBFCs is likely to remain adequate at around 15.0%, in ICRA’s view.
Return on average assets(RoA) for retail NBFCs moderated to about 1.7% in FY2016 from 1.8% in FY2015 due higher credit/provision costs and increase in operating expenses, which to an extent offset the improvement in the interest spread (due to reduction in cost of funds). Going forward, ICRA expects NBFCs to witness some improvement in operating efficiencies, which to an extent would compensate for the expected increase in the credit costs as they move to tighter NPA recognition norms. “Ability to maintain a good interest spread in a competitive business environment would be critical for incremental RoA as it is expected to remain at about 1.6-1.7% in the near to medium term” added Kalpesh Gada.
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