Non-banking financial companies (NBFCs) and housing finance companies (HFCs) are expected to report 6-8% growth in assets under management (AUM) in FY20, the lowest in a decade, compared with around 15% last fiscal, rating agency Crisil said on Wednesday.
Constrained funding access with rising borrowing costs, de-risking of the loan book and a slowing economy are behind this slow growth of non-banks, according to Crisil.
“Confidence deficit of investors, which was initially focused on the asset-liability maturity (ALM) profile, has firmly shifted to concerns over asset quality—especially for the wholesale book," it said. Non-banks, especially wholesale-focused ones without strong parentage, would need to make structural changes and reorient their business models, the rating agency said.
Challenges remain 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, the Crisil said.
Overall borrowings by the sector between July and September 2019 were the lowest in the last four quarters since September 2018.
“The incremental cost of borrowings has also increased despite the interest-rate cycle turning south," said Crisil in its report.
“Non-banks with strong parentage, which 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," according to Gurpreet Chhatwal, the president of Crisil Ratings.
The report also pointed out that retail-oriented non-banks are faring relatively better than the others 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. This includes embracing funding-light models, shift of funding for wholesale asset classes to alternative investment funds (AIF) structure and de-risking of loan books.