Despite the ease in asset quality pressures by second half of fiscal year 2015 for major Indian non-bank finance companies (NBFCs), delinquencies will peak only by March 2015, as per India Ratings & Research report.

NBFCs’ defences in the form of solid pre-provision operating profit (PPOP) and capital buffers provide a strong cushion against India Ratings’ stress tests on scenarios of spike in credit costs and elevated funding costs.

The agency expects the revival of certain infrastructure projects (cleared by the cabinet committee in recent months), pick-up in industrial growth and corporate capex investments to benefit most of the commercial assets financed by the NBFCs, from 2QFY15 onwards.

“This would ease the pressure on the cash flows of their borrowers through enhanced utilisation of their assets and contain incremental delinquencies. New business growth, however, will likely remain subdued till 3QFY15, as it would require a longer period of sustained growth in the index of industrial production to entice operators to buy new vehicles,” the report said.

However, in a scenario of continued weak industrial growth and infrastructure projects remaining stalled, the asset quality pressures could intensify and adversely impact the NBFCs with large unseasoned portfolios, in particular, it added. 

Management focus is expected to increase on collection and recovery for the next two-three quarters as well as on controlling operating costs, to contain the impact of lower loan growth. Nevertheless, rising credit costs and elevated funding costs will suppress profitability, though it will still remain healthy, compared with commercial banks.

The rated major NBFCs’ steady operating performance (including stable asset quality) has facilitated their access to funding from banks, institutional investors and capital markets.

The ratings agency has kept the outlook NBFC sector stable in 2014.

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