The asset quality of non-banking financial companies in India will stabilise over the next 12 months, but profitability could take a hit on account of higher provisioning requirement, Moody's Investors Service said on Friday.
"The ongoing tightening of non-performing loans (NPL) recognition norms mean that the minimum standards for NBFCs will match those of banks, a credit positive," Moody's vice-president and senior credit officer Srikanth Vadlamani said.
Moody's Investors Service expects that non-banking financial companies (NBFCs) will see their asset quality stabilise over the next 12 months, although the reported NPL ratio may increase due to changing recognition norms.
It said the new NPL recognition norms, which bring the definition of NPLs in-line with the definition used by banks, will likely push up reported NPLs by 80-100 basis points over the next 12 months, it said. 100 basis points is one per cent.
"However, this change in norms will mean declining profitability for many NFBCs. The additional credit provisions needed to meet the tighter NPL norms will dent their return on assets by 20-30 basis points," Moody's said.
In its report-"Indian Non-Bank Finance Companies: Asset Quality to Stabilise"-Moody's said the retail asset quality over the next 12 months will benefit from the RBI's accommodative monetary policy and stronger economic outlook.
"This means that delinquencies that were on an upward trend due to slower economic growth, and weaker debt servicing by borrowers, will stabilise," it said, adding funding will remain a credit weakness, as regulatory restrictions on retail deposit mobilisation mean that NBFCs must rely on wholesale sources of funding.
For housing finance companies, Moody's said their assets are mainly floating-rate and any mismatches will be exacerbated if interest rates continue to fall.
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