India’s non-banking financial companies will look increasingly to offshore financing as local funding conditions may remain under pressure, Fitch Ratings said on Tuesday. However, the rating agency expects offshore access to be restricted to larger entities with stronger credit fundamentals. “India’s weaker macroeconomic backdrop is likely to add to the existing funding, growth and asset-quality strains weighing on the Indian NBFCs (non-banking financial companies) industry as a whole, underpinning our negative outlook for 2020,” the ratings agency said in a statement.
The offshore route will allow better-placed NBFCs to further diversify funding sources after fairly volatile domestic liquidity conditions over the past year, enabling them to capture relative funding-cost benefits and exploit growth opportunities, it said. “We believe that funding conditions within the domestic market will remain relatively tight for NBFCs overall, notwithstanding some improvement since the failure of Infrastructure Leasing & Financial Services (IL&FS) in late 2018. Adding to the liquidity challenges, some NBFCs have a greater sensitivity to higher-risk sectors that will be affected by the slowing economy.
“Wholesale lenders in particular…more at risk of asset impairments, especially those exposed to property-developer financing and large-ticket loans secured against property,” the agency said. Growth for such companies is likely to be constrained as funding providers continue to pull back from these segments, it said.
“Pressure for consolidation is highly likely against this background. Coupled with tighter industry regulation, this should be positive for market stability in the longer run, and is likely to benefit companies with more resilient fundamentals or those with strong strategic linkages with financially sound corporates. Such institutions should retain better access to financing in the domestic market despite broader sector pressures,” it said.