NBFCs near-term growth: ICRA

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NBFCs near-term growth: ICRA

·       AUM growth for NBFC (excluding NBFC-IFC) and HFCs was better than expectations at 9.5% in FY2022.

·       NCD issuances by NBFCs and HFCs in Q1 FY2023 hit a multi-quarter low with the same being ~28% lower than Q1 FY2022 and 65% lower than Q1 FY2021.

·       Incremental funding requirement largely met through bank borrowings as bank interest rates were favourable as compared with capital market funding.

·       Loan sell-downs may emerge as the key funding source for the sector as asset quality-related concerns have reduced and, with the revival in the growth.

The AUM growth for non-banking financial companies (NBFCs) and housing finance companies (HFCs) in FY2022 was somewhat better than ICRA’s expectations, largely driven by the steep growth witnessed in Q4 FY2022. The NBFC and HFC credit (excluding infra-financing entities) is estimated to have grown by 9.5% in FY2022. While HFCs grew ~10%, the NBFC retail segment grew by 8.5% and the NBFC wholesale segment by about 12% in FY2022. The sharp growth in the NBFC wholesale segment was attributable to the low base and the uptick in credit by large and parent-backed NBFCs, which increased their supply chain, capital market and other corporate exposures. ICRA continues to maintain the growth estimate for FY2023 for NBFCs and HFCs (excluding infra) at 9-11%.

In terms of funding sources, non-convertible debenture (NCD) issuances by non-banking financial companies (NBFCs) and housing finance companies (HFCs) in Q1 FY2023 hit a multi-quarter low with the same being ~28% lower than Q1 FY2022 and 65% lower than Q1 FY2021. The issuances were lower by ~22-28% compared with Q1 FY2020 and Q1 FY2019 as well. The hike in the repo rates by the Reserve Bank of India (RBI) in May and June 2022, along with the elevated inflation prints, have affected investor appetite. While the overall issuances were affected by the sharp fall in the participation of public sector undertakings (PSUs) operating in this space, private entity issuances were also down in Q1 FY2023 on a YoY basis. At the same time, commercial paper (CP) volumes remained range-bound for the sector over the last two fiscals. However, overall CP issuances saw some uptick in the last few months. Incrementally, in view of the increasing interest rate scenario and competitive pressures, entities may look to increase the share of short-term (ST) funding to support margins.

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Talking on the trend in the capital market yields, Ms. Manushree Saggar, Vice President & Sector Head, Financial Sector Ratings said: “Yields for NCDs and CPs have reached the pre-Covid levels, though the spread over the risk-free rate remained quite low vis-à-vis the past. The same was driven by the favourable supply-demand environment on the back of limited PSU participation and access to bank funding at favourable rates. While these factors may change going forward, the expected merger of HDFC Limited into HDFC Bank would still result in a benign spread scenario for the sector. “

During this period, the share of bank credit to NBFCs/HFCs moved up steadily over the last 5-6 months as the growth in the assets under management (AUM) resumed, post the setback in Q1 FY2022. Further, bank interest rates were favourable vis-à-vis the capital market funding for PSUs and other large and high-rated entities, which led to them shifting from capital markets to banks. Mid-sized entities, targeting certain segments (agriculture, micro and small enterprises, etc), also benefited from the priority-sector lending (PSL) tag for their bank loans and had access to funds at competitive rates from banks. The scope for further funding from banks would depend on the growth in overall banking credit as bank lending to the sector is high and stood at ~8-9%.  

Going forward, sell-downs {securitisation or direct assignment (DA)} may emerge as the key funding source for the sector as asset quality-related concerns have reduced and, the revival in growth observed in the recent past would support the sell-downs. The sell-down market has also expanded over the past few years with the improvement in the share of non-priority sector assets in the overall volumes and diversification in the investor base. Retail funding via deposits may also witness a revival with the increase in the interest rate for other funding sources as entities try to leverage their franchise.

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“Overall, ICRA has factored in a 100-basis points increase in the weighted average cost for the sector in the current fiscal. While this would impact margins, a favourable credit/provision cost position vis-à-vis the last fiscal would support the profitability of the players,” Ms Saggar added.