NBFCs face challenges as assets decline and NPLs rise, says CBO

Total assets of NBFCs declined by about two per cent during 2017

Oman’s non-banking finance companies (NBFCs), also known as finance and leasing companies (FLCs), are undergoing challenging times as the slowdown in their assets growth, declining margins and increasing non-performing loans (NPLs) may put further pressure on profitability, according to the Central Bank of Oman (CBO).

‘The economic slowdown and growth of Islamic banking appear to be taking a toll on the growths of NBFCs’, CBO said in its financial stability report released on Thursday.

Total assets of NBFCs declined by about two per cent during 2017 as compared to growth of 4.6 per cent during 2016 and 2.8 per cent during 2015. Net credit portfolio of NBFCs at the end of 2017 decreased to RO1.02bn from RO1.03bn in the previous year.

‘Going forward, the increasing funding cost, declining margins, and increasing NPLs may put pressure on the profitability of the NBFCs and they may find it increasingly challenging to maintain the level of profitability unless they make concerted changes in their business model’, CBO said. It said with the growth of Islamic banking, NBFCs are facing stronger competition from the banking sector. ‘Considering that Islamic banking entities and NBFCs are vying for similar financing classes, some consolidation among these financiers may provide value to the shareholders’, the CBO said.

The NPLs of NBFCs increased by RO32mn during 2017, while the lending slightly declined. The NPLs ratio sharply increased to eight per cent at the end of 2017 from five per cent at the end of previous year, the CBO said.

‘The NPLs ratio of NBFCs that was already much higher than that of the banking sector increased sharply during 2017, validating our concerns shown in the previous report about the risk of downgrade of credit quality of the NBFCs during the economic downturns’, the CBO added.

Considering that the operating conditions are still challenging for the finance and leasing sector, the CBO reiterated its recommendation that NBFCs should gear up their credit analysis, monitoring and risk management practices to keep the credit risk within manageable limits.

The report further added that the rising interest rates and heavy reliance on short-term bank borrowing continue to expose NBFCs to the cost and availability of bank funding.