Fitch Ratings on Tuesday said India's weaker macroeconomic backdrop is likely to add to the existing funding, growth and asset-quality strains weighing on the non-bank financial company (NBFC) industry as a whole, underpinning its negative outlook for 2020. Pressure for consolidation is highly likely against this background, it added.

The global credit agency observed that NBFCs will look increasingly to offshore financing in 2020 as local funding conditions are likely to remain under pressure. However, the global credit rating agency expects offshore access to be confined to larger entities with stronger credit fundamentals.

Fitch views wholesale lenders in particular as more at risk of asset impairments, especially those exposed to property-developer financing and large-ticket loans secured against property. Growth for such companies is likely to be constrained as funding providers continue to pull back from these segments.

"Pressure for consolidation is highly likely against this background. Coupled with tighter industry regulation, this should be positive for market stability in the longer run, and is likely to benefit companies with more resilient fundamentals or those with strong strategic linkages with financially sound corporates. Such institutions should retain better access to financing in the domestic market despite broader sector pressures," said the agency.

Tight funding conditions

Fitch Ratings said funding conditions within the domestic market will remain relatively tight for NBFCs overall, notwithstanding the improvement since the failure of Infrastructure Leasing & Financial Services (IL&FS) in late 2018. Adding to the liquidity challenges, some NBFCs have a greater sensitivity to higher-risk sectors that will be affected by the slowing economy.

The offshore route would allow better-placed NBFCs to further diversify funding sources after fairly volatile domestic liquidity conditions over the past year, enabling them to capture relative funding-cost benefits and exploit growth opportunities.

The agency observed that NBFCs will continue to play an important role in India's financial system. Retail-oriented NBFCs are significant providers of credit in rural areas– where banks are less active – and have grown in importance. Those with scale have carved out profitable niches, highlighting the robustness of business models, and as a result retained access to institutional funding sources. These features support Fitch's stable rating outlook for rated Indian NBFCs.

Meanwhile, greater use of securitisation, coupled with asset sales, will continue to help some NBFCs with granular portfolios to generate liquidity as tight funding conditions persist.

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