Global rating agency, Moody's Investors Service in its latest report has said that non-banking financial companies (NBFCs) in India will demonstrate broadly stable asset quality, but they are likely to see a spurt in delinquency levels over the next 1-2 quarters with note ban affecting their collections across asset classes. It also said the growth in loans against property has outpaced overall retail credit growth in recent years, but relatively loose underwriting practices, combined with intensifying competition, will translate into higher asset quality risk for this segment.
As per the report, over the past three years, NBFCs have gained some market share in the origination of retail lending on the back of faster growth exhibited by such entities when compared to banks. It stated that this is particularly the case when compared to public sector banks, which face significant challenges on their asset quality and overall solvency profiles.
Moody’s expects that competitive pressures from the banking sector will remain intense as banks are increasing targeting of the retail segment to offset weakness in their corporate lending. In addition, retail lending, particularly housing loans, is more capital efficient for the banks. While the NBFCs’ capitalization levels are adequate with average Tier 1 ratios in excess of 14 percent, capital generation will lag credit growth. Therefore it said that access to external capital will hold the key in sustaining the NBFCs’ growth momentum.
The report said that NBFCs' funding profiles will broadly remain stable, and funding costs should moderate gradually, given the reduction in systemic rates. Also, NBFCs will maintain well-matched asset- liability profiles, despite their weak funding profiles, a situation which will protect them against downside risks. Additionally, the NBFCs’ profitability and capital, as well as funding and liquidity levels, will stay broadly stable.