The assets under management (AUM) of retail non-banking finance companies (retail NBFCs) witnessed a sharp slowdown in growth in Q3 (October-December) FY2019 as entities facing tightened liquidity moderated their incremental disbursements, according to credit rating agency ICRA.

The agency said the AUM growth slowed to 3.3 per cent quarter-on-quarter (q-o-q) in Q3 FY2019, the slowest in the last 10 quarters. As on December 31, 2018, the same stood at ₹8.4-lakh crore, registering a year-on-year (y-o-y) growth of 21.5 per cent.

Karthik Srinivasan, Senior Vice-President and Group Head, Financial Sector Ratings, ICRA, said: “All key segments of retail-NBFC credit, which contributed to higher y-o-y growth of 24-25 per cent in Q1 (April-June)/Q2 (July-September) FY2019, namelyLAP (loan against property) and SMEs (small and medium enterprises), commercial vehicle (CV), personal credit (unsecured, including consumer durables), and microfinance witnessed a deceleration in growth.

“While it was expected that the liquidity to NBFCs would improve and conditions normalise by Q4 (January-March) FY2019, it is taking longer as market liquidity remains tight and cost is high.”

To remain moderate

ICRA expects the credit growth to remain moderate till H1 (April-September) FY2020 and revive only in H2 (October-March) FY2020. “Retail-NBFCs would register an AUM growth of 16-18 per cent in FY2019. While the growth would moderate further in H1 FY2020 because of the ongoing liquidity conditions and the general elections in Q1 FY2020, revival could be anticipated in H2 FY2020,” said Karthik.

“We expect the NBFC credit growth in FY2020 to be about 15-17 per cent, and NBFC-retail credit is expected to cross ₹10-lakh crore; growth rate could be higher if the fund flow to NBFCs improves.”

ICRA expects the asset quality and earnings profile to face headwinds with business growth slowing down and some key asset classes likely to witness increased credit related pressures.

“The operating profitability would contract, and credit cost could increase if the portfolio growth remains more moderate than in the past. Therefore, the return on managed assets (RoMA, excluding upfront gains) is estimated at 1.7-1.9 per cent for FY2020,” said Karthik.

NBFC funding

As for the share of banks in NBFC funding, while it has increased steadily from Q2 FY2019 onwards, the funding profile still remains concentrated towards wholesale funders, namely banks and MFs, the agency said in a statement.

The statement elaborated that the applicability of rating-based risk weights for banking exposure to all NBFCs (excluding core investment companies, CICs), and the exit of some public sector banks from the prompt corrective action are a positive for the near term, as this may provide some scope for incremental credit from the banking sector.

However, the willingness of banks to take incremental credit exposure, considering the steep increase in their exposure after September 2018, their own internal sectoral thresholds, and their ability to mobilise deposits/funding remain to be seen.

Meanwhile, the agency said NBFCs reduced their dependence on short-term funding (commercial papers), and witnessed a jump in loan sell-downs and direct assignment, as the total quantum of loan sell-downs by NBFCs between April and December in FY2019 significantly exceeded FY2018 volumes.

According to the agency, retail debt issuance by NBFCs also increased quite sharply in the current financial year, though it is still modest in relation to the incremental requirement.

Deposit mobilisation by deposit-taking NBFCs witnessed muted growth in FY2018 and H1 (April-September) FY2019.

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