Near-term future of India fin firms bleak - ICRA

MUMBAI Nov 11 (Reuters) - Indian non-bank financial firms may see future earnings diluted due to a shrinkage in spreads, while banks may see more defaults among the small and medium enterprises, credit ratings agency ICRA (ICRA.BO) said.

The growth prospects for the financial sector would not be so bright if the current liquidity conditions continued, said Vibha Batra, co-head, financial sector ratings on Tuesday.

"Liquidity and asset quality are likely to be the key influencing factor for future growth as well as earnings."

Retail credit growth is facing a slowdown due to high interest rates and defaults in the small and medium enterprises could rise as the latter operate on very thin margins, said Karthik Srinivasan, co-head, financial sector ratings.

"We could see rise in corporate delinquencies as well."

Fee income of banks would decline as past key drivers such as insurance distribution and retail loan origination fees would see a slowdown alongwith foreign exchange transactions, he said.

The ICRA official also said banks would find it difficult to boost non-interest income through recovery from delinquent or written-off assets as "low yielding fruits have largely been plucked".

However, the longer term potential remained strong due to India's favourable demographic profile and overall economic growth, Srinivasan said. (Reporting by Kaustav Roy)