Photographer: Ruhani Kaur/Bloomberg

Here’s Why India Ratings Shifted Its Outlook For NBFCs

Liquidity will continue to pose a challenge for non-bank lenders in the next financial year despite stable capital buffers—mandatory amount that financial institutions are required to hold besides other minimum capital requirements.

While the outlook on non-bank financial companies in wholesale lending is negative for financial year 2019-20, it remains stable for those in retail funding, India Ratings & Research said in a report. Delinquencies are expected to remain range-bound in the retail segment but if the current tightness in the wholesale segment persists, it will rise, the rating agency said.

Also, as non-banks are forced to reduce their reliance on short-term borrowings with long term funds, the rise in cost of funding will have a more adverse impact on profitability of wholesale NBFCs than retail and will lead to a contraction in margin, according to the report.

The rating agency is negative on lenders to real estate companies, where it expects slower traction to lead to lower margin and growth.

Within the retail NBFC space, outlook on loans against property is negative as intense competition prevents risk-based pricing, offering different interest rates and loan terms to various consumers based on their creditworthiness, India ratings said.

NBFCs and housing finance companies, which contribute over a third of the total organised real estate lending, are expected to see lower growth momentum in FY20. Their share as a percentage of total real estate lending will rise to 37.1 percent in FY20 from 36.1 percent in FY19, India Ratings estimated.

Segments such as collateral-based MSME loans will continue to deteriorate, the rating agency said, changing its outlook to negative for FY20 from stable. Mid-corporate and SME lending will decline if funding cost goes up, it said.

“Demonetisation and formalisation of income after the implementation of the goods and services tax caused a stretched cash flow,” Pankaj Naik, associate director at the ratings agency, said. “Over reliance on collateral rather than business cash flows of prospective borrowers led to continuing defaults.”

In the SME and mid-corporate space, however, NBFCs continued to gain market share. This trend is expected to continue in FY20. Non-banks are estimated to constitute 17 percent in FY20 from 13 percent in FY19, the rating agency said.