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Informist, Friday, Jan. 24, 2025

 

--Fitch: Large India NBFCs better positioned against modest sector headwinds 

--Fitch: Softer India econ conditions may drag dn NBFC credit growth, earnings 

--Fitch: Tighter bank funding may drag dn India NBFC credit growth, earnings 

--Fitch: See headwinds impeding performance of mid-sized, small India NBFCs 

 

MUMBAI – Tighter bank funding, softer economic conditions, and pockets of asset quality weakness are likely to weigh on the credit growth and earnings of some of India's non-banking financial companies in the near term, Fitch Ratings said on Friday. These conditions are more likely to impede the performance of mid-sized and smaller non-banking financial companies, but larger lenders are better positioned against these headwinds and should deliver a more steady performance due to more established lending operations and better funding access, the rating agency said in a report. 

 

Loan growth in the non-banking financial sector has started to fall from its high of 18% seen in the last financial year ended March, Fitch said. Credit by non-banking financial companies, excluding housing finance companies, moderated to 6.6?tween March and September due to softening economic growth. Fitch has kept its GDP growth projection for FY26 unchanged at 6.5%. For this year, its forecast is 6.4%. 

 

The slowdown in credit growth was also due to regulatory tightening which raised the cost of capital from banks and added to non-banking financial companies' compliance requirements, Fitch said. Bank lending to non-banking financial companies slowed to 8.5% on year in November from 21% on year in November 2023. This led to a surge in mutual funds lending to non-banking financial companies by 51% in November. "Capital market funding is typically more accessible for larger non-banking financial companies," Fitch said.

 

Regulatory restrictions such as higher risk-weights on bank lending to non-banking financial companies and personal unsecured loans as well as tightened guidelines on gold-backed lending and microfinance, were introduced over the past 18 months. Firm enforcement actions such as new business stoppages may also contain lending growth, Fitch added. 

 

It said it does not expect major easing in funding costs, with bank lending rates likely to remain high. Bank lending to non-banking financial companies is expected to grow at a more measured pace amid the increased regulatory risk weights and slowing bank deposit growth. 

 

Fitch expects "large lenders with better reach" to be able to manage "mid- to high-teen credit growth over the next couple of years". Secured, but cyclical, lending segments such as business loans against property and new commercial vehicle loans might face softer credit demand, Fitch said. However, collateral coverage and strengthened credit recovery processes implemented over the past few years would support asset quality, the rating agency said.

 

Fitch expects larger non-banking financial companies to continue to expand their funding sources, primarily through portfolio securitisation and offshore borrowing. Meanwhile, small and mid-sized non-banking financial companies, with more concentrated lending and funding portfolios, may face greater challenges in terms of growth, asset quality, and profitability.

 

The rating agency believes risks to Manappuram Finance Ltd. from its microfinance exposure, which stands at 24% of total loans, should be eased by the lender's large and less-risky gold loan portfolio. However, the asset quality of IIFL Finance Ltd. is more vulnerable due to its microfinance, business loan and digital loan exposure, which collectively accounted for 45% of its total on-book loans as of Sept. 30. Fitch expects used commercial vehicles, gold and housing loans to be less sensitive to the recent fall in economic activity.

 

The rating agency also expects lenders to remain cautious of unsecured products such as microfinance and personal loans, amid rising segment delinquencies. Microfinance disbursements contracted 10% on year in Jul-Sept, as lenders tightened underwriting. "Asset quality pressure is likely to persist for the next few quarters, as lenders wean off over-leveraged borrowers," Fitch said.  End

 

Reported by Ashna Mariam George 

Edited by Avishek Dutta

 

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