NBFCs’ asset quality to stabilise in a year, says rating agency Moody’s

Rating agency Moody’s on Friday said the asset quality of non-banking financial companies (NBFCs) in India would stabilise through the next 12 months, though their nonperforming loan (NPL) ratio might rise due to tighter norms.

“The ongoing tightening of NPL recognition norms mean the minimum standards for NBFCs will match those of banks, a credit positive,” said Srikanth Vadlamani, vicepresident and senior credit officer, Moody’s.

Through the next 12 months, the retail asset quality would improve due to the Reserve Bank of India’s accommodative monetary policy and stronger economic outlook, the agency said. Delinquencies, on the rise due to slower economic growth and weaker debt servicing by borrowers, would stabilise, it added.

However, the new NPL-recognition norms, which define such loans in line with the definition used by banks, might raise the NPLs reported by 80-100 basis points through the next 12 months, Moody’s said.

This might result in declining profitability for many NFBCs. The additional credit provisions needed to meet the tighter NPL norms would hit their return on assets by 20-30 basis points, the agency said. Housing finance companies, which offered home loans to salaried workers and didn’t have the same asset risks as other NBFCs, could be an exception, it added.

On a pre-provision basis, all NBFCs show higher funding costs than banks, but also exhibit much higher asset yields. Moody’s said it didn’t expect a significant increase in competition, despite the fact that banks were expand in retail segments. This is because most NBFCs show strong credit appraisal and fare well in their focus areas.

Funding would remain a concern, as regulatory restrictions on retail deposit mobilisation mean NBFCs must rely on wholesale funding sources, Moody’s said.

All NBFCs show higher funding costs than banks, but also exhibit higher asset yields...most NBFCs show strong credit appraisal and fare well in their focus areas