India’s gov’t owned NBFIs to further grow market share

Loan growth for such entities is expected to be 15% per annum in the next two years.

Government-owned nonbank financial institutions (NBFIs) in India are expected to capture more market share in the next two years, according to S&P Global Ratings.

Their policy roles to support India’s economic development will strengthen their franchises, the ratings agency said.

S&P expects relatively higher growth for entities like the National Bank for Financing Infrastructure and Development and the Indian Renewable Energy Development Agency Ltd., both of which are expected to scale up their business from a low base.

Loan growth for financial government-related entities (GREs) are expected to stay at about 15% per annum over the next two years.

Asset quality remains a mixed bag, however.

"Some nonbank financial institutions are exposed to weak borrowers, though sovereign exposure and guarantees from the government partially mitigate the risk," said S&P Global Ratings credit analyst Geeta Chugh.

"Credit costs for the sector have improved and are better than peers'. However, we expect credit costs for the sector to rise as their loans season, recoveries dwindle, and the benefit of excess provisions created in previous years tails off,” Chugh added.

Earnings are expected to be moderate for the development financial institutions, including those that focus on small industries (SIDBI) agriculture (NABARD), and housing (NHB). These include the Indian Railway Finance Corp. and the Export-Import Bank of India.

These entities tend to have weak margins despite their lower cost of funding, S&P said.

“Margins are constrained by the entities' policy roles. Some operate on a cost-plus basis while others have a cap on lending margins for the refinance business,” it said.

In contrast, Power Finance Corp., REC Ltd. and IREDA make higher margins as they lend to relatively weaker borrowers, it said.