Mumbai: Credit rating agency India Ratings and Research (Ind-Ra) on Monday cut its FY20 growth forecast for non-banking finance companies (NBFCs) to 10-12% from 15% earlier, and also revised the sector outlook to negative from stable.

The rating agency cited funding challenges and slowdown in economic activity, which is evident from the fall in vehicle sales, slowdown in rural infra activity, and challenges to small and medium enterprises (SME) as reasons behind the reduction in its growth forecast.

India Ratings also maintained negative outlook on large ticket housing finance companies (HFCs).

"Ind-Ra expects structured finance (SF) rated transactions to remain stable in the second half of FY20 on account of cherry-picked loans, significant amortisation, minimum utilisation of credit enhancement, and the consistently robust performance of underlying retail and commercial loan assets when compared to overall industry trends," it said.

The agency said it expects overall profitability to moderate across the industry as a rise in funding cost and falling lending opportunities would lead to increased margin pressure. The ability to partially pass on the increase in funding cost to retail borrowers also remains constrained due to subdued demand, it said.

"Most NBFCs have been facing funding challenges post the credit crisis in September 2018, and though the funding costs have softened, they remain higher than the costs prevailing a year ago. With the funding tightness being accompanied by possible asset-side headwinds in light of slowing demand, NBFCs have been grappling with a double whammy," it added.

According to India Ratings, during this period, NBFCs also had to increasingly rely on alternate measures to generate liquidity, including asset sales and securitization and direct assignments of loans. NBFCs with strong credit profiles have been better equipped to tackle challenges facing the sector, enabling them to gain market share.