NBFC earnings, growth revive in Q3, seen at pre-COVID levels in FY23: ICRA

Agencies

NEW DELHI: The earnings and growth performance of non-banking financial companies have revived in the third quarter of the current financial year and are expected to head towards pre-COVID levels in the next fiscal year, rating agency ICRA said.

“While the disbursement and AUM (assets under management) trends have revived in Q2FY2022 and Q3FY2022, the trend is likely to continue in Q4 of FY2022 as impact of the third wave of the pandemic was limited,” the agency said.

ICRA pegs AUM growth of retail NBFCs at about 5 to 7 per cent in the current financial year and 8 to 10 per cent in the next, while that for Housing Finance Companies is estimated at 8 to 10 per cent in the current year and 9 to 11 per cent in the next.

However, for wholesale NBFCs, the AUM is seen shrinking in the current financial year before stabilising in FY23.

The rating agency said that the setbacks witnessed in the first quarter of the current fiscal year, which witnessed a devastating second COVID wave, would act as a drag on the overall growth for NBFCs in FY22.

“ICRA notes that the disbursement growth would have to remain healthier for a sustained AUM growth.”

Within the retail NBFC segment, the growth impetus is largely seen from personal credit, microfinance and gold loans as other traditional asset segments such as the vehicle finance space and credit for business still face hurdles on asset quality and supply bottlenecks, ICRA’s Vice-President of Financial Sector Ratings said.

With some NBFCs changing reporting practices in line with a clarification on NPAs in November by the Reserve Bank of India, the reported gross stage 3 loans could be impacted, ICRA said.

Even as the RBI in February provided an extension –till September–on the applicability of the norms, those NBFCs which have aligned to the new rules are not expected to revert, the rating agency said.

The RBI’s new guidelines, which are aimed at harmonising recognition of income and asset classification practices for banks and NBFCs, could lead to a rise in reported bad loans for some entities, analysts had predicted.

This was primarily because several NBFCs had been adhering to a practice of upgrading NPAs (gross stage 3 loans) to gross stage 2 loans after receiving merely a single installment of payments, reports quoting sector experts said.

“Incrementally, performance of the restructured book, would remain a monitorable in the near term, as sizeable restructuring was undertaken in H1FY2022 and typically had a moratorium of 3- 6 months,” ICRA said.

According to the agency, liquidity for the NBFC sector remains sufficient, in line with the trend of the last two years, with most players maintaining coverage for three-month-ahead repayments.

Furthermore, lower AUM growth in the current financial year necessitated limited incremental funding requirements, ICRA said.

“As per ICRA’s estimates, NBFC and HFCs would require Rs.1.8-2.2 trillion of incremental fresh funding for meeting its growth requirement in FY2023; assuming entities continue to maintain their liquidity buffers.”

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