NBFCs may overtake banks on retail loan front, says Crisil study

Non-banking finance companies could soon give banks a run for their money on the retail loan front, if a Crisil study is anything to go by.

The credit rating agency has assessed that the retail loan portfolio of NBFCs, excluding mortgages, is likely to equal that of commercial banks by end March-2013.

NBFCs' loan portfolio — personal loans, car loans, vehicle loans, loans against shares/gold/property — could see a 20 per cent compounded annual growth over the next two years to reach Rs 4 lakh crore, from the current Rs 2 lakh crore, the rating agency said.

Releasing the report titled “Retail NBFCs: The shine is back, but will it last?” Mr Pawan Agrawal, Director, Crisil Ratings, said that NBFCs will increase their market share because of their ability to reach out to rural areas.

About 60 per cent of NBFCs' business comes from rural and semi-urban areas, against one-third for banks.

The study also said that the asset quality of NBFCs will continue to improve over the medium term and their gross non-performing assets are expected to decline to around 2.2 per cent by end-March 2012, from 3.5 per cent as on March 2010.

The improvement will be driven by a structural shift in asset composition towards secured asset classes, stronger underwriting norms and monitoring mechanisms and a favourable business environment, the report said.

Currently vehicle loans constitute 60 per cent of the asset portfolio for NBFCs. But going ahead, there would be greater diversity in assets classes with a rise in the share of gold loans and loans against property, Mr Agrawal said.

While bank loans are the largest source of funding for NBFCs, securitisation is also significant. But if the proposed guidelines on securitisation are implemented in the current form, it could impact their fund raising ability.

“From a risk perspective, diversification of funding sources is better,'' Mr Agrawal said.

NBFCs' ability to access the capital market has also improved. Over the last three years, NBFCs have raised Rs 17,000 crore worth equity funding and this could be a trend, going ahead.

Additional challenges for the NBFC sector include the proposed regulations by the Reserve Bank of India, increased competition, ability to attract and retain talent, governance issues such as more qualified independent directors and developing a second tier of management, said Ms Roopa Kudva, Managing Director and CEO, Crisil.