NBFCs: Navigating rough waters

A slowdown in assets growth, declining margins and increasing non-performing loans put further pressure on the profitability of NFBCs in 2018. Muhammed Nafie reports

Oman’s non-banking finance companies (NBFCs) sector faced major challenges during the year 2018, such as liquidity crunch, increasing defaults, delayed payments and increased provisioning requirements.  In addition, there has been stiff competition from commercial banks and Islamic banks including the Islamic windows of commercial banks in the retail and SME segment. To meet the regulatory requirements, the banks were also aggressive in the SME segment and they have managed to wean away customers in this segment from NBFCs bringing down both the credit quality and yields.

As observed by Aftab Patel, CEO of Al Omaniya Financial Services, in his management discussion and analysis report submitted at Muscat Securities Market (MSM), the NBFCs witnessed a problematic year as the tightening of liquidity in the market has raised the cost of funding and also raised the fears about steep hike in interest rates amidst prevailing depressed business sentiments. Patel says, “Against the backdrop of the challenging economic situation, the financial institutions were facing the herculean task of maintaining adequate liquidity and healthy asset quality. The withdrawal of the government deposits placed in the local market has created stress in the liquidity resulting in the steady increase in the interest cost of NBFCs. Oman’s non-banking finance companies are undergoing challenging times as the slowdown in their assets growth, declining margins and increasing non-performing loans have put further pressure on their profitability. Going forward, the low credit offtake combined with the increasing funding cost, reduced margins, and increasing NPLs may put pressure on the profitability of the NBFCs and they may find it increasingly challenging to maintain the level of profitability unless the economic situation improves.”

Robert Pancras, CEO of National Finance says in his company’s management discussion and analysis report submitted at MSM, “The leasing and finance sector showed slack growth during 2018 on account of marked increase in cost of funds and a general slowdown in both the government and private sectors. We have witnessed a slowdown in credit offtake due to the dearth of new projects combined with retarded growth of contracting companies in major segments viz. oil and gas, infrastructure, construction etc due to delays in the payments to government project contractors.”

In 2018, the National Finance Company emerged as the largest non-banking finance company in the country, after successfully completing the acquisition of Oman Orix Leasing Company through a merger. Says Taya Jandal Ali, chairman of the company, “The company continues to follow a prudent provisioning policy based on its assessment of the risks inherent to its portfolio and is in full compliance with provisioning norms prescribed by the Central Bank of Oman and the International Financial Reporting Standards.”

He adds, “While the low global and regional growth forecast for the medium term is expected to create stress on the liquidity and funding costs, the company is well positioned to deal with the changing business environment as a result of its strong financial position, well-established processes, well-trained personnel and long experience in this business.”

Says Mohamed Abdulla Al Khonji, chairman of United Finance Company (UFC), “2018 was a tough year for FLC’s as a whole. The market witnessed a slowdown in the implementation of developmental projects thus providing limited opportunities for the expansion of business. This triggered a decline in the demand for commercial vehicles and equipment due to a dearth of avenues for deployment of assets, excess capacity, drop in hiring rates and delayed settlement of dues by contractors. The sale of private vehicles also registered a decline as a result of an increase in the cost of living and the conservative outlook of citizens and residents. These developments resulted in a decline in the overall market size triggering intense competition. Banks continued their penetration into vehicle financing and the SME funding segment further reduced the market share of FLCs and increased competition among peers. Though there were indications of easing of market liquidity, it was volatile and pushed up borrowing costs. This resulted in finer margins and a decline in net interest income. The market continued to reel under the delayed payment cycle resulting in the strained cash flow of borrowers. This resulted in a cascading effect of borrowers delaying/defaulting on their loan obligations and triggered the increase in the incidence of delinquencies during the year.”

Another major player, Muscat Finance has increased the business booking during the year to very close to its own set targets, with a slightly modified business composition. Says Faisal bin Mohamed Al Yousef, chairman of the company, “Muscat Finance is anticipating that the more conservative risk approach will lower the levels of delinquency going forward and counter the effect of the few older accounts that experienced significant stress lately, largely due to the tight payments and liquidity situation of contractors. We expect this to set the stage for a sustained and improved future profitability.”

Considering that the operating conditions are still challenging for the finance and leasing sector, NBFCs are expected to gear up their credit analysis, monitoring and risk management practices to keep the credit risk within manageable limits rather than focusing on book building.

Looking ahead
Despite the recent recovery in oil prices, the Government of Oman has maintained its aim to continue with its prudent fiscal management including controlling current spending. Analysts are cautiously optimistic about the economic situation of Oman in light of a focused development plan, the prioritisation of public investment, focused growth of SMEs and concerted effort on the diversification plan.

With low oil prices, payments to large infrastructure projects are expected to remain delayed, continuing the cash flow strain in the economy. This is expected to have an impact on the quality of assets with banks and FLCs, going forward. The increased cost of borrowings owing to tight liquidity conditions in the market may impact net interest income and profits. If the cash flow situation remains difficult in the first half of the year, then there will be an increase in non-performing loans with a subsequent impact on provisioning and profits.

Faisal Al Hashar, chairman of Taageer Finance, says, “The liquidity position in the market is expected to continue to be tight. The banks continue to adopt a cautious approach in lending and continued to increase interest rates, hence sustaining a high growth rate in terms of new business does pose a major challenge to the FLC Industry.”

Adds Khalid Said Al Wahaibi, chairman of Al Omaniya Financial Services, “We continue to foresee an extremely challenging year ahead. The company is resilient and cautiously optimistic of posting satisfactory performance in 2019. The company is well aware of the current economic scenario and has initiated proactive mitigating measures. The company is fundamentally strong with solid net worth, clean loan book, lowest Non Performing Loans and high Non-performing asset coverage. As such the company has the ability to operate competitively and post satisfactory performance in the coming years.”

Diminishing margins due to intense competition from banks, liquidity crunch in the market, increasing trend in the cost of funds, expected reduction in both private and public spending, delayed payments on the existing contracts and expected delinquencies due to reduced cash flow at the individual and corporate borrower’s level and liquidation of major contracting companies are causes of concern. The impact of the low credit offtake and the slow economic momentum could impact the business volumes and top-line growth on the one hand and the increase in delinquencies may impact the net margins and result in dilution of the NPA coverage.