ICRA: NBFC recovery to gain steam in FY23; retail NBFCs face near-term risk from Covid: ICRA

NBFC recovery to gain steam in FY23; retail NBFCs face near-term risk from Covid: ICRA

20 Jan , 2022 By : monika singh

NEW DELHI – Business recovery of Indian non-banking financial companies (NBFCs) is likely to gain traction in the next financial year, although a rise in Covid-19 infections poses a major downside risk for the near-term performance of retail NBFCs, rating agency ICRA NSE -0.70 % said.

“Assets under management (AUM) growth in H1FY2022 was quite modest; growth outlook for the current fiscal revised down to 5-7%. There are downside risks to the growth outlook because of the new wave of infections in Q4 FY2022. However, at present, while the infections rates remain high, the operational disruptions have remained limited,” the rating agency said.

According to ICRA, NBFCs’ profitability is likely to improve partially in the current financial year ending March and climb to levels close to those that existed before the pandemic by 2022-23 (April-March).
Retail NBFCs saw a growth in assets under management of less than 1 per cent in the first six months of the current financial year, ICRA said, adding that after a decline of 2 per cent in April-June 2021, AUM growth rebounded by close to 3 per cent in the second quarter of the current year.

“In view of the muted H1 performance, ICRA has revised the AUM growth outlook for the current fiscal to 5-7% from 8-10%. Growth outlook would be exposed to downside risk in case of significant disruptions caused by the new wave of infections in Q4 FY2022,” the rating agency wrote.

According to the agency, regulatory measures taken to strengthen the structural and supervisory framework for the NBFC sector, especially those regarding stricter recognition of non-performing advances and norms of upgradation, could result in a greater focus on internal controls.

This, in turn, can have an impact on sectoral growth too, ICRA said.

“...we note that some of the key segments of retail-NBFCs, especially vehicle finance, are faced with supply-side constraints, which could pull-down growth vis-à-vis our expectation, even if the demand remains less impacted by the new wave of infections,” said A M Karthik, Vice President, Financial Sector Ratings, ICRA Limited.

He said that the increase in the restructured books of NBFCs was on expected lines and accounted for around 4.5 per cent of assets under management.

Around 70 per cent of the total outstanding restructured book of retail NBFCs was carried out in the first six months of the current financial year, Karthik added.
He warned, however, that as the restructuring in the current financial year was primarily done in the second quarter with a moratorium of 3-6 months. Any significant disruptions would impact the asset quality of the sector as the commencement of repayments from the mentioned restructured accounts in the last two quarters of the year coincided with the fresh Covid wave.

“The increase in credit costs was the key reason for the dip in the earnings performance of NBFCs in Q1 FY2022. As overdues moderated in Q2, provisions were also written-back, which led to a fall in the credit costs vis-à-vis the previous quarter. ICRA expects the credit costs in FY2022 to be lower than last year’s level in the base case,” the release read.
Karthik said that ICRA expects the return on average managed assets of retail NBFCs to show improvement in the current financial year and reach pre-Covid levels of 2.6-2.7 per cent in the next fiscal.