CARE Ratings has published a report on NBFC Sector – Trends, Regulatory Framework and Way Forward.
Due to subdued economic environment, the last two years have been challenging for the NBFC sector with moderation in rate of asset growth, rising delinquencies resulting in higher provisioning thereby impacting profitability. However, the comfortable capital adequacy, shift towards secured lending, lower ALM risk have helped the sector absorb cyclical stress on asset quality and profitability. The NBFC sector has been gaining systemic importance in the recent years with NBFC assets growing steadily from 10.7% of banking assets in 2009 to 14.3% of banking assets in 2014. The recent revised regulatory framework for NBFCs by RBI focuses on strengthening the structural profile of sector, reducing regulatory arbitrage between banks and NBFCs wherein focus is more on safeguarding of the depositors money and increasing regulatory compliance for large size NBFCs.
Accordingly, as per CARE Ratings’ estimates, Gross NPA level may be in the range of 5.8%-6.1% by 2018 from around 3.4%* as on 2014 and the profitability of NBFCs would see an impact of 35 to 45 bps due to revised guidelines. However, CARE Ratings believes that current profitability levels can absorb impact of additional provisioning requirements. Also, the three year transition period will help reduce the impact. Further the current capital adequacy level is comfortable. CARE Ratings perceives revised regulations to be positive for the NBFC sector. The regulations will make the NBFC sector structurally stronger, increase transparency and improve their ability to withstand asset quality shocks in the long run.
Over the years, the NBFC sector has become systemically important with rise in assets under management. The rising importance of NBFCs and their growing interconnectedness with banks and financial institutions as well as issues like risk management framework for the sector, regulatory gaps and arbitrages, compliance and governance issues have led to the RBI making certain regulatory changes.
In the short term, these measures would impact the profitability and asset quality parameters of the NBFCs; however, these measures will bring in more transparency and improve NBFCs structurally.
CARE Ratings invites you for a webinar on ‘Revised Regulatory Framework for NBFC – Impact Analysis’ on Thursday November 27th , 2014, at 5 pm.
Please fund attached a study on bond markets in Asia by CARE. In this study we compared Indian corporate and government bond markets with those in other Asian countries based on ADB data. Some interesting observations are:
GSecs dominate everywhere and therefore India is not an exception. The share of corporate bonds in total bonds outstanding is comparable though relative to GDP can be improved.
In terms of turnover in secondary market, Indian markets have better multiples though again it is the GSec market which leads. But the turnover ratios is still higher in corporate debt than Japan.
In other countries equities dominate after banks in terms of sources of finance for industry. Corporate debt is low down in the order, and India does relatively better than the others with a share of 18%, which is the highest for the set of 8 countries on which information is available.
FIIs have a low share in GSecs in India, while this is not the case on other countries. Clearly there is scope to increase this level.
Holders of government paper are well distributed but banks and contractual savings dominate.
While the comparison is selective and restricted to Asia, it is still indicative of the general corporate bond markets to play a secondary role to GSecs in general.
CARE Ratings has published a report on ‘Retail Asset Securitization Market in FY14’.
Indian retail asset securitization market rated volumes have decreased marginally by around 6% to Rs. 283 bn in FY14 as against Rs. 303 bn in FY13. In FY14, although there was greater clarity with the introduction of a new tax regime in Union Budget, the market started moving towards ‘direct assignment’ route due to a combination of factors making it an attractive proposition for both the originators as well as the investors.
RBI issued guidelines on reset for credit enhancement (CE) for Securitization transactions. It will provide capital relief for the originators by the partial release of CE.
The RBI circular for change in treatment of Rural Infrastructure Development Fund (RIDF) and certain other funds under priority sector guidelines has come as a relief for banks, but this could to have a negative impact on new securitisation issuances going forward
CARE Research has released 2QFY14 Result Review update in December 2013 on Indian Housing Finance Industry – “Despite spread compression, loan growth remains buoyant”
Key takeaways include:
As per NHB Residex, property prices in 12 out of 26 Indian cities witnessed northward trend sequentially (in range of 0.46% to 5.3%) in 2QFY14 with Kolkata reporting highest appreciation of 5.3%. However, 10 cities recorded contraction in property prices qoq, with Meerut observing the highest fall of 6.8% followed by Delhi 4.53%
Amid weak macro-economic and elevated interest rate/inflationary scenario, the o/s loan book of HFCs’ universe analyzed by CARE Research grew by 23% in 2QFY14 (yoy) v/s. 21% in 2QFY13 on 1) improving affordability despite rising property prices, and 2) continued focus towards tier II/III/IV cities and 3) huge mortgage penetration gap (~9% as on FY13)
CARE Research observes that average gross NPA level of the universe analyzed reduced by 5 bps to 0.67% in 2QFY14 sequentially on account of 1) continued better asset selection, and 2) robust recovery mechanism under SARFEASI act 2002
The Net Interest Margin (NIM) of the HFC universe analyzed, declined to 2.39% in 2QFY14 v/s. 2.44% in 1QFY14 on 1) elevated pricing competition from banks, 2) increased cost of fund and 3) stress on project/builder loan portfolios. However, CARE Research estimates NIM to witness improvement in FY15e on stabilized cost of fund led by falling wholesale rate & borrowing via ECB route
The total income growth of HFC universe analyzed, moderated to 18.7% in 2QFY14 v/s. 19.2% in 1QFY14 led by 1) low interest income (on suppressed spreads) and 2) fall (-13.1%) in other operating income segment
The Profit After Tax (PAT) of the HFC universe analyzed grew by 15.4% in 2QFY14 v/s. 22.7% in 1QFY14 due to 1) increased interest expenses (grew by 20% yoy) & other cost (grew by 18% yoy) and 2) contained interest income(grew by 18.7% yoy) & fall in other operational income (-13.1% yoy)
In a surprise move, the RBI increased the repo rate by 25 bps and also eased the liquidity tightening measures invoked earlier in July. While the immediate impact will be straightening of the yield curve, it also signals that inflation targeting will remain a major objective of RBI.
While policy will be shaped by the inflation number as well as the Fed actions, we are still hopeful of a cut in interest rates of 25 bps in Q4 if inflation is under control (good harvest expected this time) and clarity obtained on Fed’s tapering programme.
Click below for the detailed analysis on the RBI Credit Policy.