Indian NBFCs Show Mixed Resilience To Testing Conditions: Fitch Ratings

New Delhi, October 5: India's non-bank financial company (NBFC) sector is highly diverse, and many companies have business models and financial profiles that should continue to underpin resilience to the liquidity pressures that have tested the sector since the failure of IL&FS in September 2018, said Fitch Ratings in a report.

The more vulnerable NBFCs are likely to be wholesale and housing finance companies, which on average tend to operate with higher leverage and weaker asset-and-liability (ALM) maturity profiles, and face higher concentration risks. Tight liquidity and problems in parts of the property-development market are likely to keep these NBFC sub-sectors under pressure, at least in the near term.

India's NBFC sector grew rapidly in FY14-FY19, with the large institutions expanding at a CAGR of 20 per cent as they filled gaps in the market left by capital-constrained state banks, and kept the system-wide credit-to-GDP ratio from falling more significantly.

NBFCs' growth was in some cases fuelled by higher leverage and greater reliance on short-term wholesale funding, raising the number of ALM mismatches. These vulnerabilities, together with governance problems, were factors in the failures of IL&FS and, more recently, Dewan Housing Finance Company, the report said.

However, not all NBFCs fitted this narrative. Leverage has not changed significantly for most of the large NBFCs over the last five years. Expansion against a backdrop of low interest rates and healthy market liquidity has been supported by internal capital generation and shareholder equity. Most of the NBFCs that operate with higher leverage - which elevates their solvency risks - are housing and wholesale finance companies. The majority of retail-focused NBFCs have leverage of less than 5x, the report added.

It said business models are key drivers of differences within credit profiles. Large, retail-focused NBFCs benefit from limited direct competition from the banks, funding demand from under-served customers and loan books that are shorter term and more granular.Indian NBFCs show mixed resilience to testing conditions: Fitch Ratings