Sector Update | 13 December 2019
Sector Update | Financials
Financials – NBFC
GNPL ratio (%)
CY20 to be a year of consolidation; Asset quality a key monitorable
We attended CRISIL’s annual NBFC sector summit where the general consensus among
participants was that the sector is still not out of the woods and it would take another
four quarters for recovery.
The near term is likely to be a period of consolidation; managements have prioritized
further diversification of the liability structure, enhancement of tech capabilities, etc.
Recovery a few quarters away
Real estate portfolio mix (%)
Growth would take a backseat. CRISIL estimates AUM of the NBFC sector (ex-
government owned NBFCs) to grow 6-8% YoY in FY20 followed by 8-10% CAGR over
FY20-22. This would be driven by 12-13% CAGR in retail loans offset by negative 3-4%
CAGR in wholesale lending over FY20-22.
The auto sector is expected to witness divergent trends. Most participants expect
recovery in CVs (especially M&HCVs) to be delayed due to industry overcapacity.
Recovery in this space is at least 3-4 quarters away. On the other hand, recovery in
passenger cars is expected sooner.
Household debt to GDP is on an increasing trend, leading to a rise in retail
delinquencies. While it is still benign, it is being watched closely. CRISIL expects 150bp
rise in the GNPL ratio to 6.3% for the vehicle finance sector and ~100bp rise in the
GNPL ratio to 3.8% for LAP over FY19-21.
The wholesale lending segment is being closely watched as ~40% of the book is under
moratorium. While the GNPL ratio has increased 150bp to 3.3% during Mar-Sep’19, it
masks the difficult underlying situation. If one were to adjust for the loan book under
moratorium as well as the LRD book (which has benign delinquencies), the 90dpd+ for
the industry’s construction finance book is ~10%.
Another year to be out of the woods
There was a general consensus among participants that only the top 25-50 NBFCs
are able to manage the liability side pressure; the rest are struggling to raise
liquidity. While banks have been disbursing loans to the sector, the mutual fund
(MF) sector has not been very receptive.
This is on account of a few reasons – (a)
the debt mutual fund industry’s AUM has shrunk by ~INR2t from its peak two
years ago, (b) reduction in sectoral caps (from 40% to 30% for NBFCs + HFCs) as
mandated by SEBI, and (c) until recently, there was no clear cut insolvency
management framework for financial services companies, thus making MFs
hesitant to lend.
The situation is likely to persist for a while.
Government’s initiatives to help in resolving some problems
The participants were positive on two recent government initiatives – (a) Partial
Credit Guarantee (PCG) scheme and (b) the INR250b AIF fund. On the PCG scheme,
there were some operational issues earlier, which have now been sorted out.
worth INR40-50b are expected to be securitized in Dec’19 alone under the PCG
scheme. Participants are of the view that the AIF will be able to address 30-40% of
However, it is imperative for existing creditors to agree to the
entry of a new lender.
Research Analyst: Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com);+91 22 6129 1526 |
(Piran.Engineer@MotilalOswal.com); +91 22 6129 1539
(Nitin.Aggarwal@MotilalOswal.com); +91 22 6129 1542 |
(Divya.Maheshwari@motilaloswal.com); +91 22 6129 1540
are advised to refer
through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.