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Financial Institutions

Financial Services / India
Financial Services / India

Financial Services / India

Financial Services / India

2012 Outlook: Major Indian Non-Bank Finance Companies

Stable Now but Bumpy Road Ahead

Outlook Report

Rating Outlook

SSTTAABBLLEE

Figure 1

Rating Outlooks

(Major Indian NBFCs)

(%)

100

80

60

40

20

0

1 Rating Outlooks (Major Indian NBFCs) (%) 100 80 60 40 20 0 Positive Stable Negative
1 Rating Outlooks (Major Indian NBFCs) (%) 100 80 60 40 20 0 Positive Stable Negative
1 Rating Outlooks (Major Indian NBFCs) (%) 100 80 60 40 20 0 Positive Stable Negative
1 Rating Outlooks (Major Indian NBFCs) (%) 100 80 60 40 20 0 Positive Stable Negative
1 Rating Outlooks (Major Indian NBFCs) (%) 100 80 60 40 20 0 Positive Stable Negative
1 Rating Outlooks (Major Indian NBFCs) (%) 100 80 60 40 20 0 Positive Stable Negative
1 Rating Outlooks (Major Indian NBFCs) (%) 100 80 60 40 20 0 Positive Stable Negative
1 Rating Outlooks (Major Indian NBFCs) (%) 100 80 60 40 20 0 Positive Stable Negative
1 Rating Outlooks (Major Indian NBFCs) (%) 100 80 60 40 20 0 Positive Stable Negative
1 Rating Outlooks (Major Indian NBFCs) (%) 100 80 60 40 20 0 Positive Stable Negative
1 Rating Outlooks (Major Indian NBFCs) (%) 100 80 60 40 20 0 Positive Stable Negative

Positive

Stable

Negative

Source: Fitch

Rating Outlook

Stable, But Cautious Outlook: Fitch Ratings maintains a stable but cautious outlook on the major Indian non-bank finance companies (NBFCs) sector for 2012. The impact of a cyclical increase in delinquencies and a drop in loan growth could be absorbed by high pre-provision profits, and capital buffers are adequate at most of the nine major NBFCs (large commercial finance companies) covered in this report. However, regulatory changes could increase the costs of raising fresh capital and funding, and sharply reduce profitability in the medium term. Asset Quality Deterioration Expected: The cyclical headwinds from a moderating economy are affecting the NBFCs' asset quality, and loan growth will slow down in 2012. Fitch expects "reported" non-performing loan (NPL 180 days overdue) ratios at the nine NBFCs of 2.5%- 3.0% in 2012 (2.1% for the financial year to end-March 2011 (FY11)). Delinquencies are increasing in key business lines, but unless this is accompanied by a sharp erosion of collateral values, the high risk-adjusted margins should be able to absorb the jump in credit costs.

Regulatory Changes: The Reserve Bank of India (RBI) has introduced guidelines under which

bank loans to NBFCs are not considered priority-sector loans from 1 April 2011, which reduces

incentives for banks to lend directly to NBFCs and will increase the latter's funding costs.

Further, proposed regulatory changes include revising the NPL definition to 90 days overdue, setting a minimum Tier 1 ratio of 12% and introducing a liquidity ratio requirement. The RBI may also propose similar measures for bilateral securitisations for NBFCs to those proposed for banks. These proposed and potential changes could weaken the NBFCs' profitability and affect access

to fresh capital and funding.

Funding Access Could Worsen: The large dependence on institutional/wholesale funding is an industry-wide issue. While the proportion of short-term borrowings in FY11 was lower at most companies (compared with FY08), the regulatory changes could adversely affect funding from banks, which represents the NBFCs' largest source of funding. Although some of the larger NBFCs have attracted investments from domestic and international institutional investors, gaining access to alternate long-term debt funding is a broad industry-wide challenge.

Related Research

Other Outlooks

Analysts

Ehsan Syed +91 22 4000 1722 ehsan.syed@fitchratings.com

Ananda Bhoumik +91 22 4000 1720 ananda.bhoumik@fitchratings.com

Prakash Agarwal +91 22 4000 1753 prakash.agarwal@fitchratings.com

Profitability Under Pressure: Despite the likely downward shift in interest rates in 2012, funding costs for NBFCs may increase in the year, which, together with higher credit costs, will reduce profitability. Fitch expects the weighted average return on assets (ROA) of the nine NBFCs to range from 1.5% to 2% in 2012 (H1FY12: 2.6%; FY11: 2.9%), from shrinking net interest margins (NIMs), low loan growth and high credit costs.

What Could Change the Outlook

Access to Funding: Access to stable funding from banks, institutional investors and capital markets is a key factor in the stable outlook on the sector, and any disruption in funding access could lead to negative rating action. A large deterioration in asset quality, profitability and capital levels could also result in negative rating action.

NBFCs on Negative Outlook: An inability to raise timely equity, funding constraints or a greater- than-expected rise in credit costs could lead to a downgrade of NBFCs on Negative Outlook.

Severe Economic Slowdown: A continued decline in economic growth in 2012 in particular,

a steep drop in industrial output, affecting asset quality/asset growth and earnings could also lead to negative rating action.

Financial Institutions Key Issues Outlook for Key Asset Classes HMCVs and CEs Will be Hurt

Financial Institutions

Key Issues

Outlook for Key Asset Classes

HMCVs and CEs Will be Hurt the Most

Fitch expects heavy and medium commercial vehicle (HMCV) financing to remain weak in 2012. The agency's analysis of the correlation between the index of industrial production (IIP) and new HMCV sales for the last five years (January 2007-November 2011) shows a positive correlation of 0.63 (which increases to 0.72 in the last one year (December 2010-November 2011). Historically, IIP has shown a negative correlation with the RBI's policy lending rates (repo rates), and the agency's study also shows a negative correlation of 0.59 between IIP and repo rates in the latest year. With interest rates at a high level (the RBI's repo rate is currently 8.5%), new HMCV sales will remain subdued in 2012.

90%-95% of HMCVs in India are financed, and this is a key business line for most of the NBFCs. Although the interest rate cycle could be peaking and the RBI may start reducing interest rates in the coming months (it cut the cash reserve ratio of banks by 50bp to 5.50% on 24 January 2012), there will be a lag of several months between the cuts in interest rates and a stable/sustained increase in IIP and HMCV sales/financing.

The financing of used HMCVs is less affected by economic slowdown. However, interest rates, fuel prices and freight rates have a larger impact on the outlook of aspiring individual drivers (looking to own vehicles) and small road transport operators, who are the main buyers of used HMCVs. Demand for used HMCV financing will also thus remain weak in 2012 in view of the tough operating environment.

High interest rates, and the lower increase in freight rates over the last three years (than in diesel prices), are also increasing stresses on the HMCV operators' cash flows. This will lead to increased delinquencies in 2012, in particular for the less seasoned HMCV loans. Asset quality will therefore also come under pressure in the HMCV segment in 2012, at the same time as credit growth in this business line slows down.

Financing for construction equipment (CE) will remain weak in 2012, in view of the delays/ slowdowns in infrastructure projects and ban on mining in some regions. Due to the specialised nature of much of the equipment and the limitations on its use in other fields, delays or closure of a project can hit the cash flows of the owners. Fitch expects delinquencies to increase and asset quality to come under pressure in this asset class.

Figure 2

Index of Industrial Production (IIP) and Repo Rate

Related Criteria

Jan 2007 to Nov 2011 IIP (LHS) Repo rateª (RHS) 200 180 160 140 120
Jan 2007 to Nov 2011
IIP (LHS)
Repo rateª (RHS)
200
180
160
140
120
100
Jan 07
Apr 07
Jul 07
Oct 07
Jan 08
Apr 08
Jul 08
Oct 08
Jan 09
Apr 09
Jul 09
Oct 09
Jan 10
Apr 10
Jul 10
Oct 10
Jan 11
Apr 11
Jul 11
Oct 11

ª Repo rate as at end of each month

Source: RBI

(%)

10

8

6

4

2

0

Figure 3 Financial Institutions Index of Industrial Production (IIP) and HMCV Sales Jan 2007 to

Figure 3

Financial Institutions

Index of Industrial Production (IIP) and HMCV Sales

Jan 2007 to Nov 2011 HMCV dom. mthly. sales volumes (LHS) IIP (RHS) 45,000 35,000
Jan 2007 to Nov 2011
HMCV dom. mthly. sales volumes (LHS)
IIP (RHS)
45,000
35,000
25,000
15,000
5,000
Jan 07
Apr 07
Jul 07
Oct 07
Jan 08
Apr 08
Jul 08
Oct 08
Jan 09
Apr 09
Jul 09
Oct 09
Jan 10
Apr 10
Jul 10
Oct 10
Jan 11
Apr 11
Jul 11
Oct 11

(IIP)

200

180

160

140

120

Source: Society of Indian Automotive Manufacturers, Bloomberg, RBI

Property and Small Business Loans Remain a Concern

Fitch remains concerned about the expansion into new, higher-risk business lines, such as loans against property (LAP) and small business loans (SBL) at some of the major NBFCs, and in the broad NBFC sector in India. Besides the rapid growth and low seasoning, the collateral backing these loans (in most cases) comprises non-productive real estate assets, and some of the SBLs are unsecured. Fitch expects these asset classes also to come under stress in 2012.

Light Commercial Vehicle and Agricultural Equipment to Remain Stable

Fitch expects the financing of light commercial vehicles (LCVs) to remain largely stable in 2012. The agency's analysis shows a constantly decreasing positive correlation between LCV sales and IIP (0.86 in the last five years, 0.65 in the last two years and 0.28 in the last one year), reflecting an increasing disconnect between sales of LCVs and industrial activity. This stems from the use of LCVs for last-mile, short-distance transportation, which is influenced less by the industrial slowdown, and more by non-discretionary consumption activities.

Due to the above-average monsoon rainfall in 2011 in most parts of the country and continued government initiatives for rural development (through various rural development programmes), Fitch expects the sales and financing of agriculture equipment to remain stable in 2012.

Overall Asset Quality Under Pressure

Fitch has noticed a significant increase in 90-day delinquencies in the 2010 and 2011 vintages at some NBFCs (relative to 2008 and 2009 vintages), which indicates an increasing rate of defaults and points to pressures on asset quality. While expected lower credit growth would partially address the issue of asset quality, it could also make result in asset quality issues as a result of the lower denominator effect.

Fitch's study of trends in credit growth, "reported" weighted gross NPL ratios and one-year lag NPL ratios of the nine NBFCs from FY07-H1FY12 shows that reported NPLs peaked in FY09, when credit growth was lowest, while one-year lag NPLs peaked in FY10. The reported NPL and one-year lag NPL ratios both bottomed in H1FY12, when loan growth was at its highest. The reported gross NPL ratio is understated due to a 180-day delinquent norm for Indian NBFCs, as against a 90-day norm for banks. The denominator effect (with aggressive loan book growth in the last two to three years) also mutes the reported NPL ratio.

With a tough operating environment around the key HMCV segment and pressures on some other segments also, the loan growth of the sector will moderate in 2012. The agency expects the gross NPL ratio of the nine major NBFCs to rise and range between 2.5% and 3.0% in 2012 (2.08% in FY11). However, even with a 73% provision coverage ratio (PCR; 73% in FY11) in 2012, the incremental credit costs can be well absorbed by the pre-provision profit. This reflects the low operating cost base and high risk-adjusted margins of the NBFCs.

Financial Institutions Figure 4 NBFCs' and Banks' Pre-Provision Profitability and Credit Costs NBFC Credit

Financial Institutions

Figure 4

NBFCs' and Banks' Pre-Provision Profitability and Credit Costs

NBFC Credit costs/avg loansand Banks' Pre-Provision Profitability and Credit Costs (%) Banks Credit costs/avg loans NBFC PPOP/avg. loans Banks

(%)

Banks Credit costs/avg loansand Credit Costs NBFC Credit costs/avg loans (%) NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6

NBFC PPOP/avg. loansNBFC Credit costs/avg loans (%) Banks Credit costs/avg loans Banks PPOP/avg. loans 8 6 4 2

Banks PPOP/avg. loansloans (%) Banks Credit costs/avg loans NBFC PPOP/avg. loans 8 6 4 2 0 FY07 FY08

8

6

4

2

0

loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10
loans NBFC PPOP/avg. loans Banks PPOP/avg. loans 8 6 4 2 0 FY07 FY08 FY09 FY10

FY07

FY08

FY09

FY10

FY11

Source: NBFC aggregate data, Fitch, RBI

Figure 5

NBFCs' Credit Growth and NPL Ratios

b 1 year lag NPL ratio (LHS) Gross NPL ratio (LHS) Credit growthª (RHS) (%)
b
1 year lag NPL ratio (LHS)
Gross NPL ratio (LHS)
Credit growthª (RHS)
(%)
4
60
50
3
40
2
30
20
1
10
0
0
FY08
FY09
FY10
FY11
H1FY12
ª H1FY12 annualised. b NPLs/previous-period loans
Source: Source: Aggregate NBFC data, Fitch
Figure 6
NBFCs' and Banks' Returns on Assets
(%)
(%)
NBFC ROAª
Banks ROAª

3.5

2.5

1.5

on Assets (%) (%) NBFC ROAª Banks ROAª 3.5 2.5 1.5 0.5 FY07 FY08 FY09 FY10
0.5 FY07 FY08 FY09 FY10 FY11 H1FY12
0.5
FY07
FY08
FY09
FY10
FY11
H1FY12

ª H1FY12 annualised

Source: Aggregate NBFC data, Fitch, RBI.

Financial Institutions Figure 7 NBFCs' and Banks' Returns on Equity (%) (%) NBFC ROEª Banks

Financial Institutions

Figure 7

NBFCs' and Banks' Returns on Equity

(%) (%) NBFC ROEª Banks ROEª 25.0 20.0 15.0 10.0 5.0 0.0 FY07 FY08 FY09
(%)
(%)
NBFC ROEª
Banks ROEª
25.0
20.0
15.0
10.0
5.0
0.0
FY07
FY08
FY09
FY10
FY11
H1FY12

ª H1FY12 annualised

Source: Aggregate NBFC data, Fitch, RBI.

High Dependence on Institutional/Wholesale Funding

The high dependence of NBFCs on bank funding (over 60% of total debt in FY11) is a major sector-wide structural weakness. The significant 55% growth in bank credit to the broad NBFC sector in FY11 (compared with 23% overall credit growth) and the RBI's subsequent revised guidelines, under which bank loans to NBFCs are not classified as priority-sector loans from 1 April 2011, reduce the banks' motivation for fresh direct lending to NBFCs. Together with other proposed and potential regulatory changes, this may reduce their appetite for lending to NBFCs. It is pertinent to note that NBFCs` bank borrowings in FY11 were considerably higher than in FY08, while the proportion of debentures has more than halved, so finding alternate long-term debt funding is an industry-wide challenge in the medium term.

Funding Costs will Increase

Fitch expects the increases in funding costs to continue in the medium term, as a result of the regulatory changes (see Regulatory Changes). The NBFCs' focus on the higher-risk customer segment has been reflected in high NIMs (average 6.5% at the nine NBFCs, against around 3% at the banks). However, Fitch expects the spike in funding costs from the exclusion of bank lending to NBFCs from the priority-sector lending category of banks to shrink NIMs in 2012. Furthermore, the limitations on the NBFCs' ability to pass on increasing funding costs to a relatively weak borrower segment (the bulk of their customers are higher risk, with limited access to banking services) increase funding costs across the industry. Fitch estimates the incremental funding costs to vary from 50-200bp for the nine major NBFCs.

Figure 8

NBFCs' Capital Ratios and Unreserved NPLs to Equity (%) Tier 1 ratio (LHS) Equity/assets ratio
NBFCs' Capital Ratios and Unreserved NPLs to Equity
(%)
Tier 1 ratio (LHS)
Equity/assets ratio (LHS)
Net NPL/equity ratio (RHS)
20
15
10
5
0
FY07
FY08
FY09
FY10
FY11

Source: Aggregate NBFC data, Fitch

(%)

10

8

6

4

2

0

Financial Institutions Figure 9 NBFCs' Funding Profile (End-March 2011) Other loans Deposits 0.9% Sub debt

Financial Institutions

Figure 9

NBFCs' Funding Profile

(End-March 2011) Other loans Deposits 0.9% Sub debt 3.4% Hybrids 5.3% 0.3% Commercial paper 8.6%
(End-March 2011)
Other loans
Deposits
0.9%
Sub debt
3.4%
Hybrids
5.3%
0.3%
Commercial paper
8.6%
Working
capital
loans
17.2%
Debentures/NCDs

18.2%

Term

loans

46.1%

Source: NBFC Aggregate data, Fitch

Figure 10

NBFCs' Funding Profile

(End-March 2008)

Other loans

Sub debt

3.9%

Deposits

3.4%

4.2% Commercial paper Debentures/ 5.8% NCDs 43.6% Working capital loans 14.2% Term Loans
4.2%
Commercial paper
Debentures/
5.8%
NCDs
43.6%
Working
capital
loans
14.2%
Term
Loans

25.9%

Source: NBFC Aggregate data, Fitch

Regulatory Changes

Fitch believes the changing regulatory landscape will have a significant impact on the operating environment of the NBFC sector in the medium term, even though the impact may be limited in 2012. The high profitability and credit growth that the sector has enjoyed so far will moderate as a result of increases in funding costs and credit costs, and a drop in leverage.

Loans to NBFCs not Eligible as Priority-Sector Loans of Banks

Implementation of the revised regulatory guidelines on priority-sector lending issued by the RBI in May 2011, under which bank loans to NBFCs (except eligible NBFC-micro finance institution loans) are not eligible for the banks' priority-sector loan targets from 1 April 2011, adversely affects a major source of direct loans for NBFCs.

The "Report of the Nair Committee on Priority Sector Lending" made public by the RBI on 21 February 2012 recommends that loans to non-bank financial intermediaries for on-lending to specified segments be classified as a priority sector, up to a maximum of 5% of adjusted net bank credit or credit equivalent of off-balance-sheet exposures (whichever is higher), subject to restrictions/conditions. The conditions include: the NBFC should be registered and should have at least 65% of its assets under management on its balance sheet; the interest spread on on- lending will be capped at 6%; only incremental priority-sector loans by NBFCs will be eligible; and 15% of the accounts have to be verified by the banks' officers themselves. If and when these recommendations are implemented, it would partially lessen the impact of the guidelines implemented in April 2011, though it remains to be seen whether RBI will amend/rescind these.

NBFCs can still borrow from banks on usual commercial terms and may also be able to find many banks, especially private-sector and foreign banks, as ready buyers for the pass-through certificate (PTC) securitisation of their loans to the priority sectors. However, the increase in funding costs from PTC securitisation, including the impact on capitalisation from the deduction of credit enhancements provided, could discourage NBFCs from using this channel extensively.

Expected Changes in Bilateral Securitisations

Fitch believes the restrictions on providing credit enhancement in bilateral securitisations (as proposed for the banks in the updated draft guidelines on securitisation issued by the RBI in September 2011) could remove another key channel of funding for the NBFCs, or make funding through this route very expensive for NBFCs, if the RBI prescribes a similarly strict stance on credit enhancement in bilateral securitisations by NBFCs. Most of the NBFCs received a premium on bilateral securitisations, as buying the loans from NBFCs (most of these loans met the banks' priority-sector lending criteria) helped the banks meet their priority-sector lending targets. While the practice of booking this income upfront or amortising it over the life of the assets varies across the industry, this source of income could disappear and reduce profitability sharply for some players, especially the firms that have been very active in bilateral securitisations, such as Shriram Transport Finance Co. Ltd. ('Fitch AA(ind)'/Stable) and Mahindra & Mahindra Financial Services Limited ('Fitch AA+(ind)'/Stable).

Financial Institutions Report of the Working Group on the Issues and Concerns in the NBFC

Financial Institutions

Report of the Working Group on the Issues and Concerns in the NBFC Sector

The recommendations of the "Report of the Working Group on the Issues and Concerns in the NBFC Sector" (also called the Usha Thorat Committee, as the working group was chaired by Ms Usha Thorat, a former RBI deputy governor), made public by the RBI in August 2011 and open for public comments until 30 September 2011, could have a significant impact on the NBFCs' profitability, and thereby their access to fresh capital and funding. Fitch expects most of these guidelines to be implemented, with a little bit of modification in some clauses. The agency nevertheless considers positively the improving supervisory framework and regulatory tightening of the NBFC sector.

The report's main recommendations are listed below:

1. The Tier 1 ratio of registered NBFCs should be increased to 12%, and three years should be given to achieve the required ratio (currently the minimum Tier 1 ratio is 7.5%).

2. Asset classification and provisioning norms similar to those for banks are to be introduced in a phased manner (this includes the 90 days overdue norm for classifying NPLs, from the current 180 days past due norm for NBFCs).

3. Liquidity ratios may be introduced for all registered NBFCs, such that cash, bank balances and government securities fully cover the gaps, if any, between cumulative outflows and cumulative inflows for the first 30 days (currently only deposit-taking NBFCs are required to hold 15% of their public deposits in RBI-defined liquid assets).

4. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI) may be extended to NBFCs (currently NBFCs cannot enforce their claims on defaulters under SARFAESI).

5. Higher disclosures have been suggested by the RBI. These cover provision coverage ratios, liquidity ratios, asset liability profiles, the extent of financing of a parent company's products and the movement of non-performing assets.

6. Capital market and real estate exposures. Risk weights will be increased to 125% for capital market exposures and 150% for commercial real estate exposures (from the current 100% for both these categories).

Impact of Regulatory Changes on the Overall NBFC Sector in India

Fitch believes the changing regulatory landscape will have a significant impact on the broad Indian NBFC sector, and could lead to consolidation in the small and mid-sized segments in the medium term. Based on RBI data, as at 30 June 2011, there were 12,409 registered NBFCs, which are classified by the central bank according to the kind of liabilities they access (deposit- taking or non-deposit-taking), the type of activities they pursue (six categories, including asset financing companies, loan companies etc) and according to systemic importance ("systemically important" or otherwise).

The majority of the non-deposit-taking NBFCs are small in size and regulatory supervision becomes heavier only when their asset size exceeds INR1bn (at that threshold these are defined as "systemically important" by the RBI). There is very little financial information available in the public domain on the non-deposit-taking NBFCs that are not large enough to be classified as "systemically important".

However, based on the agency's analysis of a sample of small registered NBFCs, the dependence on bank funding has been significant and these companies will be affected most by the exclusion of bank loans to NBFCs from the priority sector category from 1 April 2011. Fitch estimates that funding costs will rise by around 200-300bp for the smaller NBFCs, and availability of credit from the banking sector could also reduce gradually, although so far the impact remains unclear.

Financial Institutions As regards the larger NBFCs – deposit-taking (297 companies at end-March 2011) and

Financial Institutions

As regards the larger NBFCs deposit-taking (297 companies at end-March 2011) and the "systemically important" non-deposit-taking NBFCs (in the latter category, out of 253 companies at end March 2011, only 149 companies used external funds/borrowings), the agency's study of bank lending in the last 10 months and discussions with NBFCs and banks reveal that to date there are no signs of a liquidity crunch at sector level. Banks have nevertheless become cautious and the cost of funds for NBFCs is increasing across the board.

While the impact on some of the larger NBFCs with the most diversified funding profiles in Fitch's rated universe of NBFCs is expected to be just around 50-100bp, the wider sector could see a 100-200bp spike in funding costs, although the impact will vary depending on the type of debt used by a particular NBFC. Additional risk premiums on fresh lending will be sharply higher for both direct lending and bilateral securitisation. Nevertheless, the NBFCs' high risk- adjusted yields should cushion the impact, and the impact on profitability manageable.

However, if the recommendations of the Usha Thorat Committee in particular, the stipulation of a minimum net worth of INR50m and asset size of INR500m for registration of NBFCs are implemented, the small NBFCs segment could undergo major consolidation. If the banks expand into the rural areas to a significant degree, the larger NBFCs could see pressure on their interest margins from increased competition, although the NBFCs' niche expertise, especially in asset valuation, and flexible (though at times informal) evaluation methods would continue to help them attract certain customer segments in rural/semi-urban India, that may not be bankable for the commercial banks.

2011 Review

Credit growth was strong at most NBFCs in 2011, and high interest rates did not affect operating performance or asset quality. The increasing leverage, larger dependence on short- term debt and low loan book seasoning led to a Negative Outlook for three rated major NBFCs. The overhang of impending regulatory changes and increasing interest rates, despite slowing economic growth, emerged as the key external credit events for the NBFC sector.

Figure 11

NBFCs Covered in This Report- Ratings and Key Financial Variables

 

National Long-

Assets

NPL

Tier 1

Name of the NBFC

Term Rating

Outlook

(INRm)

ratio

NIM

ratio

CAR

ROAA

ROAE

Shriram Transport Finance Co. Ltd.

Fitch AA(ind)

Stable

306,968

2.6

7.5

16.7

24.9

4.2

28.2

Mahindra & Mahindra Financial Services Limited

Fitch AA+(ind)

Stable

131,695

4.4

11.3

17.0

20.3

4.2

24.4

Sundaram Finance Ltd

Fitch AA+(ind)

Stable

121,092

0.8

6.0

12.6

16.2

2.7

20.7

Cholamandalam Investment and Finance Co. Ltd

Fitch AA(ind)

Stable

94,433

3.2

7.2

10.8

16.7

0.8

8.0

SREI Equipment Finance Pvt Limited

Fitch AA(ind)

Negative

97,105

3.3

6.5

11.0

15.8

1.6

12.6

Religare Finvest Limited

Fitch AA(ind)

Negative

109,824

0.1

4.3

14.9

16.2

1.4

7.5

Magma Fincorp Limited

Not Rated (NR)

NR

56,759

-

6.2

11.3

18.2

2.2

19.3

Shriram City Union Finance Limited

Fitch AA(ind)

Stable

92,769

1.9

8.4

16.4

20.8

3.1

22.1

SREI Infrastructure Finance Limited

Fitch AA(ind)

Negative

80,457

-

3.1

25.1

29.4

2.2

8.0

Financial data as of end-March 2011(FY11); except for assets all the financial data is in percentages Source: Fitch

Financial Institutions ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ

Financial Institutions

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