Non-banking finance firms expect marginal growth in demand for funds

Muscat: Leasing and hire purchase firms are showing signs of stability and overall asset growth is expected to be around 5 per cent this year, a top-level official from a non-banking finance company said.

A recovery in economic growth in the first quarter is a positive sign for the sector. The Sultanate’s gross domestic product grew by 12.9 per cent in the first quarter of this year, driven by a rise in crude oil prices, as well as a growth in the non-oil sector.

“We expect a nominal growth, which could be under 5 per cent in terms of finance provided by non-banking finance companies. There has been an element of stability in 2017,” Aftab Patel, chief executive officer of Al Omaniya Financial Services, told the Times of Oman.

Patel said a growth in investment in infrastructure generally results in a ‘trickle-down effect’ as it will increase demand for capital goods and the general demand for credit will go up.

In the first half of the year, the industry’s focus was on maintaining the growth achieved so far. Growth and profitability were subdued rather than robust in the first half.

“Provisioning levels will have to go up since we have seen quite a significant rise in non-performing loans for the sector as a whole,” stated Patel.

Therefore, he said, companies will have to maintain more than adequate provisions to ensure that the balance sheet is strong and quality of loan book is high.

“Non-banking finance companies (NBFCs) will also go through a period of consolidation, better management of receivables and better focus on the quality of assets. This has to be the focus rather than mere profitability,” Patel said, adding; “Our asset quality continues to be the best in the industry and our loan loss provisions are more than adequate.”

Referring to a recent growth in cost of funds, he said volatility had been witnessed in interest rates since the beginning of 2016, which had substantially reduced in the beginning of 2017. “Most of the NBFCs provide loans at fixed rates. Therefore, re-pricing of existing assets is not possible on the retail side. However, new loans are offered at a higher rate.”

As a result, interest margins of NBFCs are coming down. “The net margin is around 3 per cent now. The overall cost of funds has increased by 2 to 3 per cent now, compared with 2015 levels,” noted Patel.

Patel further said that since the overall growth in demand for finance has been reduced due to a slowdown in economic activity, the competition among NBFCs and other players is growing. The number of players in the market has gone up with the entry of Islamic banks and windows more than three years ago. “Asset-backed financing is suitable for Sharia-compliant institutions. As a result, we expect competition from that segment to be more intense.”

“It is a challenging environment now. So, NBFC’s have to adopt new strategies to overcome the challenges.”

Patel also noted that demand for equipment finance is little lower this year due to a slowdown in investment in infrastructure projects. “Therefore, we are diversifying into other areas, such as the hospitality, healthcare, education and retail sectors.”