REGULATORY OVERHANG Eases for NBFCs; Macro-economic Headwinds Remain

Mumbai, January 31, 2013: India Ratings has maintained a stable outlook on the major non-bank finance companies (NBFCs) sector in 2013. This is because major NBFCs’ robust pre-provision operating profit (PPOP) provides a strong cushion against rising credit costs and elevated funding costs, while there will be only limited impact of proposed regulatory changes on these companies.
 
Softening interest rates and the expected uptick in economic growth will ease off cyclical pressures in 2013. However, the continued harsh operating environment around some key asset classes, including heavy and medium commercial vehicles (a key segment for many major NBFCs) and construction equipment, and building pressure points in the fast-growing light commercial vehicles will keep asset quality under pressure. Funding costs will remain high due to the regulatory changes implemented in last two years. The agency expects return on average assets to range between 2.3%-2.5% in 2013 (FY12: 2.7%).
 
India Ratings’ stress test on the major NBFCs - which considers scenarios of multi-fold increase in non-performing loans and a significant increase in funding costs - shows strong resilience of PPOP at the aggregated level in absorbing stressed credit and funding costs.

In India Ratings’ view, NBFCs’ high dependence on banks could increase in 2013 on account of the new 30% sectoral caps on mutual funds’ debt investments (another key channel of funding for NBFCs). Despite softening interest rates, funding costs will remain elevated from the exclusion of bank loans to NBFCs from priority sector lending and restrictions on bilateral assignments. Net interest margin is estimated to drop to 5.9% (FY12: 6.1%).

India Ratings believes the new draft guidelines on NBFCs proposed by the Reserve Bank of India (RBI) in December 2012 (based on the Usha Thorat Committee Report) will strengthen the NBFC sector fundamentally in the long-term. The proposed enhancements in disclosure standards and corporate governance will increase transparency and improve investor confidence and its access to capital markets for large NBFCs (which are subject to most of these stricter requirements). The financial impact of the proposed revisions in asset classification, provisioning norms and tighter liquidity requirements will be manageable. Small NBFCs though could see increased consolidation from the proposed requirement of asset size of INR250m for registration with the RBI.

A special report “2013 Outlook: Major Non-Bank Finance Companies - Stable, but Strong Headwinds Remain” is available on www.indiaratings.co.in

The rated major NBFC covered in this report are: Shriram Transport Finance Co. Ltd (?IND AA’/ Stable), Mahindra & Mahindra Financial Services Limited (‘IND AA’/Stable), Sundaram Finance Ltd (‘IND AA+’/Stable), Cholamandalam Investment and Finance Co. Ltd (‘IND AA-’/Stable), Religare Finvest Limited (‘IND AA-’/ Negative), and Shriram City Union Finance Limited (‘IND AA-’/Stable).

(Source: Corporate Communications and Investors Relations.)