Risks for the NBFC sector remain elevated in the near term: ICRA

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The second wave of Covid-19 infection had a varied impact on the business and operations of non-bank finance companies (private NBFCs, including housing finance companies[HFCs]). While large HFCs saw a relatively limited impact on their collection efficiency (CE)[1], other NBFCs having exposure to several segments like vehicle finance, business loans and microfinance, witnessed their CEs decline by about 20-25% in May 2021 vis a vis the average Q4 FY2021, when the lockdown imposed by various states was more stringent and widespread. The CE improved marginally (up by 3-5%) in June 2021 vis a vis May 2021 levels, with states steadily relaxing restrictions.

The Impact on CE was lower during Q1 FY2022 compared to what was witnessed in Q1 FY2021 and initial feedbacks indicate a further improvement in CE in July 2021. Sustenance of the same in the subsequent months and no further impediments in the revival trends would be crucial from an asset quality perspective. We note that the headline asset quality numbers for June 2021 would be significantly elevated vis a vis March 2021, but the same is expected to subside over a couple of quarters if the CEs continue to trend upwards in the subsequent months,” A M Karthik, Vice President, Financial Sector Ratings, ICRA Limited, said.

Overall 90+dpd, of the ICRA sample[2], in March 2021 increased by only 30-40 bps over March 2020 levels, as the collections had improved steadily and reached pre-Covid levels in Q4 FY2021. Further, entities effected loan write-offs, largely during Q3 and Q4 FY2021 and, also extended restructuring to their borrowers, containing overdues. The overall write-offs during FY2021 are estimated to be about 1.6% of the AUM, which is higher by about 60 bps over the last fiscal. Additionally, during FY2021, the sector (NBFC+HFC) witnessed restructuring of 1.6% of their overall book; within this, the HFCs restructured about 1.0% of their AUM, while other NBFCs restructured about 2.2%.

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The restructured book for the NBFCs (excluding HFCs) is expected to move up to 4.1-4.3% by March 2022 while the same for the HFCs is estimated to go up to 2.0-2.2%. The overall sectoral restructured book is therefore expected to double to 3.1-3.3% by March 2022 vis a vis 1.6% in March 2021. Notwithstanding the near-term pressures, the net increase (adjusting for write-offs) in the 90+dpd in the current fiscal is expected to be about 50-100 bps. ICRA draws comfort from the provisions maintained by the entities, which continue to remain about 100 bps higher than the pre-Covid levels,” Karthik added.

The assets under management (AUM) of the sector grew by a modest 4% in FY2021 vis a vis 6% in FY2020 (16% in FY2019). The HFCs (adjusted)[3] grew by about 6% during the last fiscal; within the other NBFC space, retail credit (consisting of vehicle, business loans, personal credit, microfinance etc) grew by 4% while the wholesale credit declined on a YoY basis. Overall, the sectoral AUM is expected to grow at 7-9% in FY2022 bolstered by the growth in the NBFC retail credit and HFCs, which is expected to be about 8-10%, while NBFC wholesale credit growth would remain muted.

The increase in the credit cost has been the key reason for the fall in profitability during FY2021. With credit costs expected to remain elevated in FY2022, the earnings are likely to remain subdued. Thus, pre-tax return on the managed assets (RoMA) is estimated to remain stable at about 2.2-2.3% in FY2022.

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“The credit cost could moderate in the next fiscal, provided there are no new surges in the infection rates, which could result in the pre-tax RoMA reaching 2.7-2.9% by FY2023,” Karthik said.

ICRA’s outlook on the sector remains Negative because of the above-mentioned factors, however, the adequate capital profile, which got augmented by the slow credit growth and the increased liquidity carried by the entities in view of the uncertainties, lends support to their risk profiles. ICRA does not expect a sizeable equity requirement for the sector in the current fiscal, however, some entities are expected to raise capital for boosting investor and lender confidence. The entities, in general, are maintaining liquidity to cover more than three months’ debt repayments (without factoring any collections). ICRA expects the liquidity profile to be maintained to give comfort to various stakeholders. As per ICRA estimates, the sector would require Rs.2.0 trillion of additional funding (apart from refinancing existing maturities) in FY2022 to meet their growth requirements.