Favourable growth prospects for Infrastructure Finance NBFCs on the back of regained balance sheet strength: ICRA

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Given the disruption caused by the second wave of the pandemic, total infrastructure credit (banks and NBFC-IFCs) remained sluggish in Q1 FY2022 with infrastructure focused loan books remaining flat on Q-o-Q basis for both NBFC-IFCs as well as banks. Nonetheless, a recovery in pace of growth had followed the first wave of the pandemic, whereby total infrastructure credit clocked 10% growth in FY2021 despite having slowed significantly in H1 FY2021 with 1% growth, though, the recovery in H2 FY2021 was not evenly spread across the lenders.

Also, majority of the growth achieved in each of previous three years (FY2018-FY2020) was also back-ended. Nevertheless, ICRA expects the medium term growth prospects to be  strong as demand is expected to gather pace amid government’s resolve to focus on the Infrastructure sector to revive economic growth. Hence, a healthy growth in infrastructure credit is expected H2 FY2022 onwards.

Says Ms. Manushree Saggar, Vice President and Sector Head, Financial Sector Ratings, ICRA, “Central Government set a target of infrastructure investment of over Rs. 111 lakh crore under the National Infrastructure Pipeline (NIP) over FY2020-FY2025. While the Covid-19-induced disruption has made it a daunting and improbable target, the government’s intent of continued focus on the Infrastructure sector augurs well for growth prospects for lenders to the infrastructure sector, especially in back-drop of recovery in balance sheet strength of NBFC-IFCs.”

ICRA notes that most infrastructure sub-sectors remained resilient from a debt servicing perspective during lockdown conditions due to inherent risk mitigants and liquidity buffers, besides government support through measures such as liquidity package for cash strapped power distribution companies. Hence, the stress in infrastructure sector due to Covid-induced disruptions has been low, and NBFC-IFCs have also demonstrated relative resilience during the Covid-19 pandemic.

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Says Mr. Deep Inder Singh, Vice President, Financial Sector Ratings, ICRA, “With no major adverse impact of the pandemic led disruptions, pressure on aggregate solvency indicator of NBFC-IFCs continues to recede with asset quality indicators witnessing sustained improvement over past two years. Also, provision cover on non-performing loans has increased to an all-time high (PCR of 64% as on March 31, 2021). At the same time, proportion of portfolio of NBFC-IFCs restructured has been negligible for most IFCs and stood at significantly less than 1% on aggregate basis as of March 31, 2021. Further, ICRA doesn’t expect a major change in the restructured loan book due to impact of second wave of the pandemic.”

Further, the liquidity profiles of NBFC-IFCs though expected to remain dependent upon refinancing and/or undrawn lines of credit for plugging mismatches, have improved with reduced dependence upon short term borrowings and higher share of longer tenor borrowings in incremental fund raising amid the favorable systemic rates trajectory. Overall, IFCs, especially Public-IFCs, have reverted to healthy profitability trajectory with decline in share of non-performing loans and decline in cost of borrowings.

This is driving healthy internal capital generation and preventing an uptick in leverage. As a result, capitalization level remains adequate with a downward bias in the gearing level in recent years, which places the industry well for the medium-term growth. Also, as the constraints caused by the pandemic subside, pending stressed assets resolutions are expected to gain pace over the near term. Hence, improving asset quality trajectory for NBFC-IFCs is likely to continue; though, any stress build-up from spill overs due to region-specific headwinds faced by the renewable energy sector remain a monitorable.