India Ratings Cuts Outlook For NBFC Sector To ‘Negative’
Rating agency India Ratings and Research has cut its growth forecast and outlook for NBFC sector.
With non-bank lenders continuing to face higher borrowing costs and tighter availability of funding, rating agency India Ratings and Research has cut its growth forecast and outlook for the sector.
In a report released on Monday, the rating agency said that it expects the NBFC sector to grow by 10-12 percent in FY20 from 15 percent earlier. India Ratings has also cut its outlook on the sector from ‘Stable’ to ‘Negative’.
The change in outlook follows continued funding challenges faced by NBFCs, the slowdown in economic activity, fall in auto sales, slowdown in rural infrastructure activity and challenges faced by small and medium enterprises, the rating agency said.
Data put together by the rating agency shows that the funding mix for NBFCs has improved, with a lesser reliance on short term borrowings. Funding costs, however, remain elevated.
The proportion of borrowings through commercial papers is at a four-year low and has decreased to 9.3 percent in FY19 from 14 percent at the end of FY18, the data shows. The share of debentures was at 38.9 percent, while bank funding made by 38.2 percent of the funding raised by NBFCs in FY19.
Funding costs for most NBFCs remain elevated. Those facing the highest funding costs include JM Financial Ltd, Piramal Finance Ltd, Edelweiss Financial Services and IIFL Finance Ltd, data compiled by the agency showed.
Risk Factors
Among the segments that continue to face elevated risks are loan against property and developer loans.
"The LAP segment has been under pressure because of the cash flow pressure plaguing the SME segment, which is the dominant market for LAP," India Ratings said. Enforcement of the property rights, which is the main form of security under LAP remains a challenge for lenders, said India Ratings’ analysts Jinay Gala and Pankaj Naik. With property prices decreasing in several geographies across the country, lenders face a bigger problem due to valuation errors and high inventory levels, the analysts added.
NBFCs with a direct exposure to real estate developers will also continue to face pressure.
With slowing flat sales and piling up of inventory, India's real-estate developers are facing both consumer demand pressures and a funding crunch. Of the total Rs 6 lakh crore of outstanding credit to real-estate developers, NBFCs and HFCs together provided around 40.6 percent or Rs 2.43 lakh crore, with remaining credit provided by banks.
NBFCs alone have an exposure of around Rs 1 lakh crore, or 23.7 percent of their loan book, to real estate developers, according to data provided by the rating agency. About 70 percent is presently under moratorium as most of the credit disbursed was disbursed in FY18 and in the first-half of FY19.
The 18 -24 month moratorium on principal repayments will end in the second-half of FY20 and in the first-half of FY21, said Gala. This means that installments on principal repayments of around Rs 70,000 crore would start to come due from H1 FY21 onwards, albeit in a staggered manner.
Ultimately, if the sales velocity of flats does not pick up by then, "there may be serious asset-quality challenges which will come up for the lenders," Gala said.
"There could also be a pick-up in asset-sales, especially to larger developers or asset reconstruction companies. Here, the interest component would have a haircut of around 100 percent, while the principal due would largely be recovered on a case-to-case basis," he added.
Gala said that the top NBFCs that were lending to developers were growing at 50-60 percent on a compound annual growth rate basis between FY14 and FY19, but that growth has tapered down to 5-10 percent this year.