ICRA has come out with its report on Indian retail non banking finance market. According to the rating agency, retail credit for NBFCs is expected to grow by only 17% in 2012-13. Gross NPA% of the NBFCs is likely to deteriorate from March 31, 2012 levels of 1.56% due to an adverse operating environment.
ICRA Ratings has come out with its report on Indian retail non banking finance market. According to the rating agency, retail credit for NBFCs is expected to grow by only 17% in 2012-13. Gross NPA% of the NBFCs is likely to deteriorate from March 31, 2012 levels of 1.56% due to an adverse operating environment.
NBFCs1 in India continue to grow profitably by meeting the credit needs primarily of self employed borrowers while maintaining reasonable asset quality and prudent level of leveraging. Understanding borrowers profile and dynamics of borrower segments of such NBFCs is a prerequisite for the performance evaluation of NBFCs. Although NBFCs cater to a wide range of segments, there are common characteristics of borrowers across these segments. A typical borrower (of such NBFCs) needs to be approached to originate a credit deal (is unlikely to walk into a branch to seek credit, except for Gold loan borrowers), is more complex to credit assess (as compared to a salaried person) and could require intensive monitoring and servicing efforts. Given these characteristics, banks particularly Public Sector Banks find it unattractive to operate in such segments, as they struggle to maintain good risk adjusted returns from such segments. As over three fourth of the Indian credit market is served by PSBs, low credit penetration (at around 10%2 as on March 31, 2011) vis. a vis. Deposits (68%) may be a reflection of PSBs inability to cater to such borrowers. It is critical to be nimble footed, service oriented and extremely cost efficient to be profitable in the segment. In light of this private sector banks and NBFCs mostly compete with each other in such segments.
NBFCs have reported a managed advance growth CAGR of 35% in last five years, and as on March 31, 2012 had a gross NPA3% of 1.56%, net NPAs to net worth of 3.8%, Return on Equity (ROE) of 16.24%, and a reported capital adequacy at 19.42% (tier 1 capital % of 15.75%). NBFCs are likely to witness a slowdown in the growth in 2012-13 in light of lower growth in the key segments they operate in; at the same time there may be some build up of delinquencies and a downward bias in interest margins. Despite this NBFCs are likely to report double digit ROE. Key performance highlights and outlook are as follows:
Managed retail credit of NBFCs reported a 32% growth during 2011-12. In light of significant slowdown in Commercial Vehicle (CV), Construction Equipment (CE) and Gold loan portfolio segments in the current financial year (which put together account for around 56% of total NBFC retail credit), ICRA expects retail credit for NBFCs to grow by only 17% in 2012-13.
As per ICRA estimate, total NBFC retail managed credit ~Rs. 2960 billion as on March 31, 2012, was distributed across commercial vehicles (29% of total), gold loans (17% of total), mortgage (16% of total), construction equipment (10% of total), cars (15% of total), unsecured loans (8% of total) and tractor loans (3% of total). This proportion could undergo some shift because of slowdown in vehicle sales and in gold loans and continued expected growth in the mortgage segment.
As for asset quality, Gross NPA% of the NBFCs is likely to deteriorate from March 31, 2012 levels of 1.56% due to an adverse operating environment. Segments that are likely to witness an increase in delinquencies are Commercial Vehicle, Construction Equipment, SME lending and capital market funding.
NBFCs currently report exposures in 180+ overdue bucket as NPAs; The proposed RBI revision, if implemented, in the NPA recognition norm to 90 days, along with the adoption of higher provisioning requirements for NPAs and standard assets (in line with that for banks) could lead to a increase in NBFCs' credit provisions by 0.55% in the short term, impacting the profitability. Over the medium term, the decline in profitability could be in the range of 15-20 bps as NBFCs realign their monitoring and recovery systems to the 90-day.
Provisioning coverage for NBFCs is at ~55% and the solvency levels (net NPA as percentage of net worth) of the sector remains comfortable at 3.8%. However provisioning coverage may drop to 35%-38% incase RBI were to implement its proposed change in NPA recognition norms for NBFCs from 180 day to 90 day.
NIMs for NBFC as on March 2012 stood at 6.30%, which is lower by around ~25 bp compared to the previous financial year on account of the increase in funding costs. Earnings profile of NBFCs is largely skewed towards fund based driven operations with income from fee based activities accounting for only 3.4% of total income or 0.55% of total assets.
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