S&P Global Ratings' latest report, titled 'Indian Finance Company Outlook 2023', predicts that the asset and credit quality of finance companies (fincos) will continue to improve, bolstered by robust macroeconomic trends. The report states that despite the increase in interest rates, the economic recovery and strong buffers will support the credit profiles of domestic financial companies. The report also suggests that stronger finance companies will likely gain market share due to better access to funding, while weaker ones may resort to originate-and-distribute business models. S&P Global Ratings has given most rated fincos a stable outlook, reflecting their robust earnings, capitalization, and improving asset quality.
The report from S&P Global Ratings warns that inflation and interest rate increases could pose risks to the asset quality of finance companies despite their crucial role in credit delivery and sustained market share gains. The report notes that as of March 31, 2022, finance companies hold a market share of 70% in the domestic banking system, with non-banking financial companies (NBFCs) accounting for the highest share at 17%, followed by housing finance companies (excluding HDFC) at 4%. HDFC Ltd and All India Financial Institutions hold 3% and 6% market share among finance companies, respectively. However, the merger of HDFC and HDFC Bank is expected to decrease the market share of finance companies in the Indian banking system.
The report states that finance companies with advanced technology will have an advantage over their competitors. The increasing penetration of smartphones and internet connectivity, as well as the growing population of tech-savvy individuals, provide significant opportunities for lending in India. Additionally, specialized fintech companies such as NBFC-P2P or NBFC-AA, which are under the supervision of RBI, are emerging.
The rating agency expects borrowing costs by finance companies to rise amidst rising interest rates. It says the asset liability management and liability mix have witnessed a significant improvement owing to the tightening of regulations by the government. The emerging co-lending models are also easing funding pressure amongst finance companies. The rating agency predicts that in 2023, bank loans will be the primary source of funding due to the unstable nature of capital markets.
Among the leading finance companies, S&P Global has given a BB+ rating to Bajaj Finance Ltd and expects a positive outlook. For Hero Fincorp Ltd, the global agency expects a stable outlook and has given a BB rating. For Shriram Finance Co. Ltd and Manappuram Finance Ltd, S&P Global has given a BB- rating each and expects a stable outlook for both finance companies. For Muthoot Finance Ltd, the global agency projects a stable outlook and has given a BB rating.