Non-banking financial companies (NBFCs) and housing finance companies (HFCs) are expected to report to a decadal low growth in assets under management (AUM) of 6-8% in FY20, compared with around 15% last fiscal, said rating agency Crisil on Wednesday.
According to Crisil, constrained funding access with rising borrowing costs, de-risking of loan book and a slowing economy are behind this slow growth of non-banks.
“Confidence deficit of investors which was initially focused on asset-liability maturity (ALM) profile has firmly shifted to concerns over asset quality – especially for the wholesale book," it said, adding that non-banks – especially the wholesale-focused ones without strong parentage – would need to make structural changes and reorient their business models.
The agency said that challenges continue on the liabilities side 15 months since liquidity problems surfaced, though steps by the government and regulators to support and structurally strengthen the sector have provided some relief.
Overall borrowings by the sector, between July and September 2019, were the lowest in the last four quarters since September 2018.
“Incremental cost of borrowings has also increased despite the interest-rate cycle turning south," said Crisil in its report on Wednesday.
According to Gurpreet Chhatwal, president, Crisil Ratings, “Non-banks with strong parentage — that account for around 70% of the sectoral AUM — have been less impacted on the funding front. They are likely to drive sectoral growth over the medium term."
The Crisil report also pointed out that retail-oriented non-banks are faring relatively better and funding challenges are abating here. However, wholesale-oriented ones— primarily, real estate developer financing and structured credit — remain affected more in terms of access to funds, it said.
“In terms of asset quality, delinquencies are expected to inch up, albeit marginally, for retail asset classes such as home loans and vehicle finance, which together account for more than half of the overall sectoral AUM. The economic slowdown has contributed to a cyclical uptick in delinquencies across retail segments," the report said.
However, Crisil also said that non-banks are adapting to the changing environment and a business model reset is in order. These include embracing funding-light models, shift of funding for wholesale asset classes to alternative investment funds or AIF structure and de-risking of loan books.
Krishnan Sitaraman, senior director, Crisil Ratings said that going forward rising delinquencies will be a key monitorable for NBFCs in the light of economic slowdown.