The market share of non-bank finance companies (NBFCs) would continue to expand, believes India Ratings and Research (Ind-Ra). The expansion would be supported by NBFCs’ ability to customise products, price the risk and manage ultimate credit costs, especially related to small-ticket loans, viz., microfinance, light commercial vehicle (CV), used CV, small-ticket housing loans and loan against property. However, competition is likely to intensify in certain segments such as large-ticket housing, new heavy CV and large-ticket loan against property. Thus, risk-adjusted pricing may come under pressure. As the transition to the formalisation gains momentum, many NBFC borrowers may turn poachable and creditworthy for banks.
NBFCs have generally maintained a matched
asset-liability profile, which will help them in the current scenario of
tightening liquidity and rising interest rates. However, there are few NBFCs that
have been aggressive toward the funding side and have increased their reliance
on short-term funding, creating an asset-liability tenor mismatch. With the
hardening of interest rates and heightened competition limiting maneuverability
on the lending side, Ind-Ra expects margins to come under pressure for NBFCs.
Ind-Ra does not expect any significant rise in delinquencies in the NBFC sector and, hence, expects credit costs to remain stable. NBFCs’ asset quality has been largely resilient to the twin disruption of demonetisation and goods and services tax implementation. The government’s increased focus on the rural economy in the budget for 2018-19 could be a boost for NBFCs with a significant portion of their assets in rural areas. Meanwhile, few segments (microfinance institution) and, to some extent, LAP have been disproportionately impacted. According to Ind-Ra, while stress in the microfinance segment has peaked out, large-ticket LAP would remain under pressure, as small and medium-sized enterprise borrowers remain under pressure in the wake of the transition to the goods and services tax. Additional pressure on NBFCs book could be from their lending to real estate developers, where stress would start reflecting, especially if funding becomes tighter either from NBFCs or private equity firms.
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