India Rating expects NBFCs to grow by 9.5% in FY22

04 Mar , 2021 By : kanchan Joshi

MUMBAI : India Ratings and Ratings (Ind-Ra) has maintained a stable outlook on retail non-banking finance company (NBFC) and housing finance company sectors for FY22. Improved system liquidity and strong capital buffers have resulted in growth in loan disbursements. The rating agency however continues to maintain a negative outlook on the wholesale NBFC sector for FY22, owing to the significant asset quality challenges and increased competition from banks.

The rating agency has maintained a negative outlook on NBFCs offering commercial vehicle loans, loans against property, and small microfinance institutions and has a stable outlook on housing financiers, tractors and gold financiers for the next financial year.

Ind-Ra expects operating cost to normalise to pre-covilevels for NBFCs, thereby leading to a moderation in pre-provision buffers to absorb higher-than-envisaged credit loss. The rating agency expects non-bank lenders to grow by 9.5% year on year in fiscal year 2022, whereas growth for housing finance companies would be around 10% year on year, higher than the expectations of 4%-5% and 6.5%, respectively, for fiscal year 2021.

While stress among NBFCs has moderated owing to government schemes, Ind-Ra expects asset quality to remain elevated. Any recovery would hinge on economic gaining momentum in fiscal year 2022, it said. That said the rating agency expects lower softer delinquencies and moderate addition to gross non-performing assets. As on 30 September 2020, the system-level stressed assets for NBFCs stood at 8%. The rating agency expects 1.5%-3% of the book getting restructured and 100-150bps addition to existing GNPA, leading to an overall stressed book of 9.5%-11% for these NBFCs. Credit cost is expected to normalise for non-banks for FY22 due to the higher COVID provision taken in fiscal year 2021.

Earlier this week the other rating agency ICRA too had noted that non-performing assets (NPAs) of NBFCs could increase to 5.6-6.3% of loans at the end of March 2022 from 4.6% at the end of fiscal year 2020.

Brokerages on the other hand expect NBFCs to show improved asset quality as collection efficiency picks up and provisions cover increases. Credit Suisse, for instance, has upgraded earnings of NBFCs by 15-25% as it expects only 130-300 basis points addition to the stressed pool in the next financial year.