Resilient earnings in FY2021; Covid 2.0 impacts asset quality in Q1 FY2022: ICRA

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The affordable housing finance companies (AHFCs) which had been growing at significantly higher rates than the overall housing finance industry in the past too  witnessed a moderation in growth in FY2021 following the Covid-19 induced challenges in the operating environment. Nevertheless, given the largely underpenetrated market, favourable demographic profile, government trust on housing and  a favourable regulatory/tax regime support the long-term growth outlook for the sector.

Says Ms. Manushree Saggar, Vice President and Sector Head – Financial Sector Ratings, ICRA, “The growth in the loan book moderated to 10% Y-o-Y  in FY2021 and Q1 FY2022 due to the lockdowns following Covid wave 2; while portfolio remained flat as on June 30, 2021, as compared with March 31, 2021. However, with some improvement in operating environment conditions demand is expected to pick up in the subsequent quarters and the AHFCs loan growth could increase to 12-15% for FY2022.”

ICRA notes that Covid 2.0 has exerted further pressure on the asset quality indicators for these players. With stricter lockdowns across various states in Q1 FY2022, the collections for these AHFCs were impacted and unlike the moratorium and restrictions on bucket movement which were available in Q1 FY2021, there were no such dispensations this time. Hence delinquencies, especially, in the softer buckets shot up significantly.  To put this in perspective, the 30+ days past due (dpd) for some select AHFCs[1]increased to 7.2% as on June 30, 2021 from an estimated 3.2% as on March 31, 2021; though headline 90+ dpd remained under control. Overall, for the AHFC industry, the reported gross NPA/Stage 3% (excluding data for one player) stood at 2.1% as on June 30, 2021. 

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“With steady improvement in collection efficiencies since June 2021, forward bucket movement is likely to be contained for most players, though resolution/rollbacks could take longer as it would be difficult for the borrowers of these AHFCs to clear multiple instalments at the same time. Thus, ICRA expects GNPA/Stage 3% to be 3.6-3.9% by the end of March 2022 compared to 3.3% as on March 31, 2021,” Ms. Saggar added.

The liquidity profile of these entities is expected to remain comfortable supported by the sizeable on-balance sheet liquidity being maintained by these players. At the same time, the availability of funding lines would be imperative for growth. The banking channel and NHB will remain key sources of incremental funding. Given the low gearing levels, the need for growth capital is likely to remain low. While the net interest margins (NIMs) of the AHFCs moderated in FY2020 and further in FY2021 owing to negative carry on the sizeable on-balance sheet cash, the impact was offset by a commensurate decline in the operating expenses in relation to the average assets with the increased scale of operations. This, coupled with stable credit costs compared with FY2020 and higher upfront income from direct assignment (DA) transactions, led to a stable performance in FY2021and the reported RoA of 2.4% for FY2021 was in line with ICRA’s projections.

“Given the likelihood of elevated credit costs as compared with pre-Covid levels, the return on assets (RoA) is likely to remain at 2.2-2.4% in FY2022 compared to the range of 1.8-2.4% during FY2017-FY2021, despite improved scale of operations. Over the long term, the ability to improve the operating efficiencies further and control the credit costs would be imperative for improving the return indicators,” Ms. Saggar concluded.