India Ratings and Research (Ind-Ra) on Monday cut its growth forecast for non-banking finance companies (NBFCs) for FY20 to 10-12 percent from 15 percent projected earlier, and also revised its sector outlook on NBFCs to negative from stable. It maintained its negative outlook on large-ticket housing finance companies.

In its FY20 Mid-Year NBFCs and SF Outlook report, Ind-Ra said that the funding challenges and slowdown in economic activity will pose challenges for the NBFC sector, and overall profitability is expected to moderate as the rise in funding cost and falling lending opportunities would lead to increased margin pressure.

Ind-Ra said the slowdown in economic activity was evident from the fall in auto sales, slowdown in rural infra activity and small and medium enterprises (SME) challenges. With demand remaining subdued, it said that NBFCs’ ability to partially pass on the increase in funding cost to retail borrowers would also remain constrained.

“With the funding tightness being accompanied by possible asset-side headwinds in light of slowing demand, NBFCs have been grappling with a double whammy,” said Ind-Ra. While funding costs have softened since the credit crisis of September 2018 in the wake of the IL&FS crisis, it said that costs still remain higher than the levels seen a year ago.

Due to the liquidity pressure, NBFCs also had to increasingly rely on alternate measures to generate liquidity, including through asset sales - securitisation and direct assignments of loans. During this period, Ind-Ra said that NBFCs with strong credit profiles have been better equipped to tackle these challenges, enabling them to gain market share from other NBFCs.

While the government has announced a slew of measures to support this sector, including increasing the ticket size to be included in the priority sector status for onward lending to low ticket housing and micro SME loans, partial credit guarantee for securitisation transactions, and allowing companies to access external commercial borrowings to repay rupee loans taken for capex or on-lending, India Ratings believes these will only play out over the medium to long term.

Report highlights

Cuts FY20 growth forecast for NBFCs to 10-12 percent from 15 percent earlier.

Revises the NBFC sector outlook to negative from stable.

Growth forecast cut in view of funding challenges, slowdown in economic activity.

Fall in auto sales, rural infra activity slowdown, SME challenges to impact NBFCs growth.

Most NBFCs face funding challenges post credit crisis of September 2018.

Expect overall profitability to moderate across the industry.

Rise in funding cost and falling lending opportunities to lead to increased margin pressure.

Funding tightness accompanied by possible asset-side headwinds due to slowing demand a double whammy for NBFCs.

Ability to partially pass on increase in funding cost to retail borrowers remains constrained due to subdued demand.

Expect NBFCs facing funding challenges to get into a co-origination model with banks.

Slew of measures announced by govt to support NBFC sector will only play out over medium-to-long term.