MUMBAI: Indian non-banking financial institutions (NBFIs) will continue to face challenging conditions in 2021 even as the economy is projected to gradually recover, according to Fitch Ratings. Those with construction funding and SME exposure which will take longer to recover from the crisis will face greater risks.
Fitch said that meanwhile, the Reserve Bank of India's (RBI's) recent proposal for scale-based regulation of NBFIs could strengthen sector stability.
India's economy started to emerge from the effects of severe pandemic-driven restrictions in mid-2020. GDP expanded by 23.2 per cent quarter-on-quarter in the quarter ended September after contracting by 23.9 per cent year-on-year in the June quarter.
However, Fitch expects NBFIs' asset quality and profitability to continue to be under pressure, particularly for sectors that continue to face demand gaps like construction and some SMEs. These sectors are likely to experience greater problem-loan formation in 2021 as borrower relief programmes taper off.
This will create provisioning risks and underpins Fitch's expectation for a worsening sector outlook in 2021, though only moderately so relative to 2020's already challenging environment. Meanwhile, Fitch said that secured consumer-lending segments have already begun to improve in recent months.
Loan repayments on products like gold finance and home loans have substantially improved and are returning to pre-pandemic rates, and these sectors are likely to remain more resilient. However, urban consumer-focused lenders' margins will be squeezed as banks increasingly turn to these market segments as well due to their perceived lower risk.
In contrast, rural-based lending will be supported by the strength of agricultural production (plus 3.4 per cent year-on-year in September).