The challenges faced by the banking system on asset quality and capitalisation levels continue to provide the retail-focused non-banking finance companies (NBFCs) and the housing finance companies (HFCs) ample opportunities to expand their footprint over the medium term. Greater geographical penetration and the ability to better leverage technology for credit decisions and service delivery, gives NBFCs and HFCs an edge over many of the banks in providing doorstep delivery of financial services.

Growth

The Rs.6.3 lakh crore retail NBFC credit is likely to expand by about 16-18 per cent in FY2018, a growth rate similar to the previous fiscal but lower than the earlier year. The expected moderation in growth is primarily on account of the transitional impact on small businesses and self-employed borrowers – the key target segment for NBFCs – on account of the GST implementation and the increased competitive pressures from banks in some few key asset classes such as commercial vehicle, passenger vehicles, loan against properties. The asset quality concerns in some key asset classes like LAP and microfinance, which account for a sizeable share of the retail NBFC credit pie, has also tempered near-term growth.

However, the rise in new-age fintech companies and rising digital footprint across the credit spectrum should help NBFCs and other lenders grow the pie over the medium term as more borrowers are absorbed into the formal channel.

The Gross NPAs (excluding NBFC-MFIs) of about 4.9 per cent as on June 30 this year for the segment is likely to rise by 25-50bps by the end of the fiscal as they complete the transition to the 90-day NPA recognition norm. The credit costs are likely to remain elevated in the current fiscal and negate the benefits of reduction in borrowing costs resulting in another year of moderate return on equity of around 10.5-11.5 per cent. While current capitalisation levels are adequate, further equity infusions would be required to support growth. But, access to equity should remain easy for entities with focussed business models given the ample systemic liquidity amidst growth opportunities.

Like NBFCs, the outlook for the HFCs also appears sanguine notwithstanding the slowdown in the current fiscal with a slowdown in new project launches, disruptions in the real estate market owing to implementation of RERA and GST and end users’ incremental preference for finished inventory/RERA approved projects. Government initiatives like Credit Linked Subsidy Scheme for the low and mid income borrower group and infrastructure status to affordable housing projects have led to improved affordability for borrowers as well as greater supply of affordable projects. The HFCs’ home loan book should maintain a growth of 19-21 per cent in FY2018 leading to an overall housing market growth of 17-19 per cent.

New entrants

The competitive intensity has increased sharply with a number of new entrants in the housing finance market coupled with higher focus by the existing HFCs and banks. Further, the associated pressures on profitability has lead to a steady rise in riskier sub-segments like non-housing loans, proportion of self-employed borrowers and affordable housing in the overall portfolio of HFCs or sustain high growth levels with some dilution in underwriting norms to justify the current valuation multiples for some of them. However, the asset quality indicators should remain under control with likely gross NPAs of 1.0-1.3 per cent by FY2018 on the back of strong monitoring and control processes of HFCs, coverage under SARFAESI, adequate borrowers’ own equity in the properties and the large proportion of the properties being financed for self-occupation.

Armed with relatively better equity valuations and ample systemic liquidity, the NBFCs and HFCs would do well if they are able to maintain their credit discipline and strengthen their internal processes as they look to scale up, taking tactical advantage of the prevailing inabilities of many banks.

(Group Head-Financial Sector Ratings ICRA)