Profitability of retail-focused non-banking financial companies (NBFCs) is expected to remain under pressure in the current fiscal as their return on assets (ROEs) could drop due to new RBI guidelines, ratings agency ICRA said today.
"... Profitability of retail focused NBFCs are expected to remain under pressure in FY-16, as ROEs could drop to under 10 per cent (from 10.8 per cent in 9M-FY15 and 12.6 per cent in FY14) on account of the one-time impact as NBFCs adopt a tighter minimum NPA recognition policy," ICRA said.
Over the medium term however expected revival in growth, a supportive operating environment and a stable or soft interest rate regime are factors which could support NBFCs ability to improve profitability and shareholder returns, it said in a release.
The profitability is expected to be impacted as the new RBI regulations requires NBFCs to migrate to a minimum NPA (non-performing asset) recognition of 150 days from 180 days, which would increase gross NPA and credit provisions.
"ICRA estimates the one-time hit on earnings owing to this transition to be 20-30 bps, which could lower ROEs to below 10 per cent in FY16."
It said the economic environment, following a challenging period over the past couple of years has started to show signs of revival.
Factors such as a pickup in commercial vehicles (CV) sale volumes, expected improvement in investment and industrial production provide an enabling credit off-take environment.
"ICRA expects retail NBFC credit growth to improve to 14-17 per cent in FY16 from 11-13 per cent in FY14 and 9 per cent in FY13."
Among others ICRA expects the proportion of funding through debt market instruments to increase further until banks lower base rates.
In 2015-16, ICRA estimates NBFC fund requirement to be Rs 2.2 trillion.