India's economic recovery to drive fincos' credit quality: S&P

The asset quality and credit quality of finance companies (fincos) will continue to improve, supported by strong macroeconomic trends, according to the latest report by S&P Global Ratings, which was released on Monday. Titled ‘Indian Finance Company Outlook 2023’ the report says the economic recovery and good buffers will support the credit profiles of domestic financial companies despite a rise in interest rates.

According to the report, stronger finance companies will gain market share owing to access to stronger funding whereas the weaker finance companies could resort to originate-and-distribute business models. “Asset quality of fincos will continue to generally improve, supported by strong macroeconomic trends, despite rising interest rates. The stable outlooks on most rated fincos reflect their strong earnings, capitalisation, and improving asset quality,” the report says.

However, the rating agency expects higher inflation and interest rates to be risk factors that can derail gains in the asset quality of finance companies. The report says that fincos play an important role in credit delivery and have sustained market share gains despite competition. According to the report, as of March 31, 2022, banks constitute 70% market share in the domestic banking system, whereas finance companies have a market share of 70%. Of this, non-banking financial companies (NBFCs) has the highest market share of 17%, followed by housing finance companies (excluding HDFC), which constitutes 4% market share amongst finance companies. HDFC Ltd and All India Financial Institutions constitute 3% and 6% market share among finance companies, respectively.

As per the report, the merger of HDFC and HDFC Bank will reduce the market share of finance companies in the Indian banking system.

In terms of sector penetration, the report says that technologically advanced finance companies will have an edge as compared to their peers. “Rising smartphone penetration, increasing internet connectivity, and the young tech-savvy demographic segment present vast lending opportunities in India,” the report says.

“Some specialised financial technologies (fintech) companies like NBFC-P2P or NBFC-AA, which come under RBI supervision, are also coming up,” it adds.

The rating agency expects borrowing costs by finance companies to rise amidst rising interest rates. It says the asset liability management and liability mix have witnessed a significant improvement owing to the tightening of regulations by the government. The emerging co-lending models are also easing funding pressure amongst finance companies. “Bank loans will dominate incremental funding in 2023 amid volatile capital markets,” the rating agency says.

Among the leading finance companies, S&P Global has given a BB+ rating to Bajaj Finance Ltd, and expects a positive outlook. For Hero Fincorp Ltd, the global agency expects a stable outlook and has given a BB rating. For Shriram Finance Co. Ltd and Manappuram Finance Ltd, S&P Global has given a BB- rating each and expects a stable outlook for both finance companies. For Muthoot Finance Ltd, the global agency projects a stable outlook and has given a BB rating.