Financial companies likely to face difficult operating environment: Fitch

India’s banks and non banking finance companies (NBFCs) will continue to face a difficult operating environment due to a slowdown in the macro economy and weak funding conditions, credit rating agency Fitch said.

Slower growth will likely intensify asset-quality tensions particularly for NBFCs, real estate and lending to small and medium enterprises (SMEs), the rating agency said. Fitch expects India's real GDP growth to slow to 4.6 per cent in the financial year ending March 2020 from 6.8 per cent in fiscal 2019, led by a squeeze in credit availability from NBFCs and deterioration in business and consumer confidence. Growth rebound to 5.6 per cent in fiscal 2021.

“Funding conditions are therefore likely to remain weak and Indian financial institutions risk-averse in the year ahead - in line with Fitch's negative sector outlook for both banks and NBFCs. The support measures from the authorities have had a mixed effect, with the onus largely on banks' weak balance sheets through higher lending and regulatory forbearance,” Fitch said.

The contagion could also spread to banks because of their direct exposure to NBFCs and the second-order economic impact of being exposed to the sectors that are adjusting to the credit squeeze by NBFCs.

“The recent fundraising by a number of NBFCs during the first two months of 2020 points to a slightly improved funding environment. Fitch expects NBFIs to continue to tap the offshore market, but access is likely to remain uneven and limited largely to retail-focused NBFIs and those backed by large corporate groups. Wholesale and housing finance companies are the most at risk as they will continue to find it difficult to raise funds - given their greater exposure to the real-estate sector where we expect further pressure on cash flows and collateral values,” Fitch said.