The Hindu Business Line

Q3 FY19 saw a ‘sharp’ slowdown in growth of AUM at retail NBFCs

Growth dropped to 3.3 per cent, the lowest in last 10 quarters, says ICRA

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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 AUM growth slowed to 3.3 per cent quarter-onquarter (q-o-q) in Q3 FY2019, the lowest 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, namely, loan against property, small and medium enterprise­s, commercial vehicle, 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 credit growth to remain moderate till H1 (AprilSepte­mber) FY2020 and revive only in H2 (October-March) FY2020. “Retail-NBFCs will register AUM growth of 16-18 per cent in FY2019. While growth would moderate further in H1 FY2020 because of the ongoing liquidity conditions and general elections, revival could be anticipate­d in H2 FY2020,” said Karthik.

“We expect NBFCs’ credit growth in FY2020 to be 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 (excluding upfront gains) is estimated at 1.7-1.9 per cent for FY2020,” added Karthik.

NBFC funding

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

It 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 positives 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.

Commercial papers

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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