Fitch gives cautious outlook for NBFC sector

NEW DELHI: Rating agency Fitch today gave cautious medium-term outlook for the Indian non-banking finance companies (NBFCs) citing high funding cost and low profitability.

"The agency remains cautious on the medium-term outlook of the NBFC sector due to the regulatory changes that could impact funding from domestic banks," Fitch said in a statement.

Last year, the Reserve Bank of India ( RBI) excluded bank loans to NBFCs from the priority sector category, thereby reducing banks' incentives for direct lending to NBFCs.

Presently, about 65 per cent of the NBFC funding comes from banks.

The RBI's move "will increase funding costs for NBFCs in 2012 and beyond," Fitch said, adding that the outlook for 2012 is stable.

It said the cautious outlook arises in the view of challenges in raising cost-effective funding that may squeeze margins, impair growth prospects and increase the costs of raising fresh capital.

"...profitability (of NBFCs) will drop due to an expected increase in credit and funding costs," Fitch said.