• HDFC
• 30 Aug 2018
• Knowledge Centre

HDFC, Tester

Non-banking financial companies (NBFCs) have been steadily growing their share in the credit market. NBFCs are expected to consolidate their position further over the next couple of years, despite the massive recapitalization programme for public sector banks.

 

A report by credit rating agency CRISIL forecasts the segment’s share increasing from 19% to 20% by 2020.

 

The share of NBFCs, including housing finance companies (HFCs), in total credit across India, has increased substantially. “We expect their (NBFCs) share to continue growing, driven by their key strengths – responsiveness to customer demand, adaptability, local knowledge, and innovation,” said Mr. Krishnan Sitaraman, Senior Director, CRISIL Ratings.

 

The key sectors where NBFCs are likely to witness strong growth are housing loans, vehicle finance, real estate, and structured credit and MSME loans, he said.

 

Alternate Sources

 

One of the key challenges faced by NBFCs vis-a-vis banks is the high cost of funds. However, NBFCs have diversified their source of funding.

 

“Over the last 3 to 4 years, the contribution of capital market borrowings in the NBFCs’ overall borrowing profile has been rising. They have tapped other avenues for funding like bonds, NCDs, CPs, and securitization. They are bringing in capital market investors and reducing the dependence on bank borrowings. These measures have enabled NBFCs to reduce their cost of borrowings,” said Mr. Sitaraman.

 

“NBFC’s have been able to raise equity capital as well from external investors including PE funds. For some of the larger NBFCs, the share of bank borrowings in their overall borrowings, which was over 40%, has now come down ~30%,” he added.

 

An ICRA report emphasizes that growth in the retail loan book of NBFCs is likely to come in at 19% to 21% in FY19, largely driven by the high demand for commercial vehicle (CV) loans.

 

Increased Presence

The rating agency said it “expects NBFC retail credit, which stood at Rs 7.5 lakh crore as on 31st March 2018 to expand to 19-21% during FY-19, as key growth drivers for large asset sub-categories remain intact.”

 

SME credit is expected to grow at 23%- 25% in FY19, driven by sizeable unmet demand, increased working capital requirement post GST implementation and limited credit availability from banks. The report revealed that the share of unsecured personal credit and microfinance together increased to 15% in March 2018, from 8% in March 2015, growing at a CAGR of 45%. ICRA expects growth in this segment to remain robust at ~40% in FY19 as well.

 

Mr. A M Karthik, Assistant Vice-President &Sector Head (financial sector ratings), ICRA said “NBFCs are focusing more on unsecured credit to improve product diversification, while also chasing higher business yields. Better borrower seasoning with NBFCs, availability of credit bureau data and access to improved information technology and credit assessment systems supplemented NBFC credit to this segment,” he said.

 

Asset quality was also supported by better or relatively stable performance indicators of key asset classes, namely CV, SME credit (including a loan against property), tractor and construction equipment.

 

Mr. Atul Karwa, Research Analyst, HDFC securities, shares the reasons for his belief in the long-term growth story of the NBFC segment. “NBFCs are likely to continue to witness healthy margins going ahead. Though the reasons for this are many, my belief is that there are some that would be more relevant than the rest. For one, NBFCs have managed to source funds at competitive rates, an aspect that could impact margins, hence promising growth. The second is the increase in the quantum of loans disbursed. These, combined with other positives, will play a pertinent role in the future of the NBFC segment,” he said.