Turbulence for NBFCs is far from over

Turbulence in the NBFC (non-banking financial company) sector is far from over. India Ratings and Research (Ind-Ra) on Thursday maintained a ‘negative’ outlook on NBFCs, both retail and wholesale, for FY21, citing slow balance sheet growth, elevated slippages, and weak profitability.

According to the rating agency, the slowdown in auto sales, working capital issues in the SME (small- and medium-sized enterprises) segment, high level of debt and inventory in the real estate sector have heightened the level of stress in the NBFC space.

The debt crisis stoked by the collapse of Infrastructure Leasing & Financial Services Ltd (IL&FS) in September 2018 had led to an acute liquidity crunch. Although the situation has eased, access to capital by NBFCs remains asymmetrical, it said. The co-lending model adopted by a few non-banking financial companies is yet to take off meaningfully for impact.

“While the funding growth has dipped sharply for the large and sponsor supported NBFCs, the situation remains challenging for the rest. When market borrowings remain selective, bank funding, primarily in the form of assignments, has picked sharp pace and is likely to remain the primary source of funding,” Ind-Ra said.

However, the rating agency expects capital buffers to remain stable, as NBFCs will consume capital at a slower pace in light of higher delinquencies, increased borrowings, and operating costs, coupled with weak economic growth. An increase in credit cost for most NBFC players is not ruled out.

Profitability will also remain under pressure as margins will get squeezed on account of higher on-balance sheet liquidity, more long-term borrowings, and hardening of funding cost for some NBFCs.