The report said some of the foreign entities have also taken positions in the truck and corporate finance business besides car financing. They are expected to bring down the returns and spreads in this business too, on account of their low cost funds, support of international parents and sophisticated mechanisms to monitor and control risks.

"Although mergers would have been a logical route for structural growth and consolidation, most potential buyers have adopted a cautious approach to mergers because of the apprehension regarding the undisclosed liabilities of the NBFCs. Instead, buying of securitised portfolio of cherry picked assets has been the most common method of acquisition," Crisil said. Some of the large players, including domestic financial institutions, are also buying part of the branch network of the smaller regional NBFCs to increase their reach and geographical coverage, it added.

The rating agency report on the credit fundamentals of NBFCs said that the weak capital base of majority of NBFCs and low predictability of business mix are expected to have an impact on their risk profile over the medium term. The restructuring in the industry has left only a handful of Indian entities which survived the stress. In the changed scenario, cost of funds and ability to capitalise at regular intervals are key factors for NBFCs to sustain good asset quality, maintain reasonable return and defend market position.

"The NBFC sector has been under severe pressure due to deteriorating credit fundamentals and difficult business conditions in economy which have impacted credit growth in their primary businesses. Additionally, the flow of retail public deposits has declined sharply after the changes in the regulatory environment and an increasing caution exercised by retail investors," the Crisil study said.

According to the study, the emergence of mutual funds as an alternative source of funds augurs well for the stronger NBFCs in their efforts to raise funds at competitive costs. Also the investor base has widened for securitisation of receivables by NBFCs.

"However, the NBFCs' dependence on public deposits and bank lines is expected to come down significantly in the future. The captive finance companies will enjoy the advantage of manufacturer's brand equity, lower establishment costs, preferred financier status and asset quality support in various forms. However, the impact of diversification of business interests outside manufacturer's business will be critical," Crisil said. The uncompetitive size, difficult business outlook and the inability to recapitalise has resulted in a large number of weak companies to close down.

In future, only NBFCs with distinct competitive advantage like strong parent or established resource raising advantage or strong collection/recovery capabilities are likely to be able to enjoy competitive position in asset financing business, Crisil pointed out.