More Indian NBFCs to go overseas amidst funding crunch

Local funding remains constrained as providers pull back amidst a slowing economy.

India’s non-bank financial companies (NBFCs) with stronger credit fundamentals will look increasingly to offshore financing in 2020 as the outlook for local funding conditions remains negative, says Fitch Ratings.

India's weaker macroeconomic backdrop is expected to further weigh in on existing funding, growth and asset-quality strains that beset the Indian NBFC industry, noted Fitch. Funding conditions within the domestic market will also remain tight in 2020 despite some improvements since the failure of Infrastructure Leasing & Financial Services (IL&FS) in late 2018.

Growth of some NBFCs is likely to be constrained in 2020 due to their exposure to high-risk segments where funding providers are expected to pull back amidst the slowing economy. Of these, Wholesale lenders remain at high risk from asset impairments, especially those exposed to property-developer financing and large-ticket loans secured against property.

Also read: Liquidity pressures to loom over India's NBFCs in 2020

Going overseas for financing will bolster the stability of NBFCs’ portfolios, according to Fitch.

“The offshore route would 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,” the report said.

Fitch added that the pressure for consolidation remains highly likely against this background, and will help stabilise the market in the long run.

“Coupled with tighter industry regulation, [consolidation] 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,” noted Fitch.

Greater use of securitisation, coupled with asset sales, will continue to help some NBFCs with granular portfolios to generate liquidity as tight funding conditions persist.