FY23 NBFC Outlook: Focus shifts to growth amid normalization in operating environment - Ind-Ra

25 Feb 2022 , 01:23 PM

India Ratings and Research (Ind-Ra) has maintained a neutral sector outlook and a Stable rating Outlook for non-banking finance companies (NBFCs) for FY23. Ind-Ra believes FY23, in absence of any negative event, would see normalization of business activities, after facing challenges in the past few years following the default by Infrastructure Leasing & Financial Services Ltd (‘IND D’) leading to liquidity challenges and then the COVID-19 pandemic.

NBFCs would begin the year with sufficient capital buffers, stable margins and sizeable on-balance sheet provisioning, while adequate system liquidity would aid funding. Nevertheless, an expected increase in systemic interest rates and asset quality issues in some segments due to the lagged impact of pandemic would be a drag on the operating performance.

The sector has been facing increased regulatory oversight and push towards convergence with banks through various measures such as scale-based regulation, realignment in asset quality classification and Prompt Corrective Action norm. The incremental impact of the notification on NPA recognition however will be moderate as the maximum impact has already been seen in 3QFY22 figures and NBFCs are holding adequate provisions.

Secured Asset Business Could See Revival: Ind-Ra expects NBFCs to maintain loan growth of around 14% yoy in FY23, with FY22 growth closing at 7%-8%. Ind-Ra thus believes FY23 could be a year of normalcy in disbursements. The products such as loans against property, housing loans and vehicle finance could witness a higher demand than personal and unsecured business loans which saw a higher demand during the pandemic. Growth in the vehicle finance segment could revive depending on the availability of vehicles which are facing component shortage due to the pandemic, along with an increase in borrower confidence towards an economic recovery.

The gold loan segment could see moderate growth in tandem with gold prices along with opening up of other financing avenues for borrowers. Loans against property would see reasonable growth as it would remain the prime source for borrowers to avail loans for working capital or growth capital. Lenders in the personal loan and business loan segments in the unsecured category are likely to remain among the most impacted asset classes and lenders thus would remain cautious. In this aspect, supply chain financing where the obligations of lenders remain on strong anchors could gain traction. Tractor financing could remain stable with growth being in line with that of the agriculture sector and government rural spend.

Interest Rate would Inch-up, Requiring Recalibration across Funding Avenues: As we navigate out from the easy liquidity scenario, there could be a testing of floor regarding funding costs for lenders, where a rising interest rate would impact funding costs for incremental borrowings across lenders. The existing on-balance sheet liquidity would help in maintaining funding costs for certain quarters. However, the cost of incremental borrowings is likely to rise across capital market instruments which would be the first to get repriced in a new operating environment where pass-through from banks could be with a lag.

During the pandemic, banks have been quite supportive towards lending to non-banks and their share has been rising in the funding mix of non-banks, which has been highlighted by the regulator in the rising risk of interconnectedness. Thereby, Ind-Ra believes as market confidence becomes stronger, a larger part of borrowings for large non-banks would move towards capital markets. There could some increase in the optimum use of commercial papers for balancing funding costs, as currently its share across lenders has largely been reduced. However, as the liability duration across lenders has increased, the impact of a rising interest rate would be limited on margins and lenders could catch up with an increase in lending yields as the situation demands.

Credit Cost to Normalize, but Asset Quality Headline Number could remain Elevated: Ind-Ra expects loan growth in FY22 and FY23 to be around 8% yoy and 14% yoy, respectively, for its rated NBFCs (excluding government entities). NBFCs’ stage 3 assets could increase to 6% by FY23 from 5.6% in 3QFY22, primarily due to slippages from the restructured and Emergency Credit Line Guarantee Scheme supported book. However, the credit cost impact is likely to be moderate as NBFCs have created adequate provisioning buffers.

Ind-Ra believes the segments facing heightened delinquencies for nonbanks are the ones where customer profile could be most vulnerable such as two-wheelers, passenger vehicles, unsecured business loans, microfinance and heavy commercial vehicles. Ind-Ra believes among these asset classes, the vehicle finance segment could see a revival in FY23 as the business momentum improves. The gold finance segment has shown a resilient performance in the pandemic and would continue to be so in the medium term.

FY23 HFC Outlook: Lowest Interest Rates in Decades, Wage Growth & Stable Property Prices to Drive HFCs’ Loan Growth

India Ratings and Research (Ind-Ra) has maintained a neutral sector outlook and a Stable rating Outlook for housing finance companies (HFCs) for FY23. The lowest interest rates seen in decades along with stable property prices and the low impact of the COVID-19 pandemic on job losses and wage growth in the salaried segment have led to improved affordability for borrowers. This accompanied with the need for a bigger housing space during the pandemic bodes well for financers to drive the overall assets under management (AUM) growth higher, despite high competition from banks. Ind-Ra believes affordable HFCs could witness strong loan growth due to increasing geographic penetration and a possible increase in ticket size (partly due to asset inflation), thereby driving loan growth higher in FY23.

Home loan borrowers have benefitted on multiple counts in terms of affordability based on following factors — 1) borrowing rates being among the lowest in the past two decades, even lower than the current 10-year G-Sec rates; 2) concessions offered in stamp duty rates by certain states; 3) government push through Credit Linked Subsidy Schemes along with continuing income tax exemptions; 4) relatively stable real estate prices for the past few years along with developers offering incentives to clear their inventories; and 5) wage growth maintaining its pace higher than property price rise for the past few years which bodes well for financiers to grows its AUM.

Ind-Ra has also maintained a Stable rating Outlook on HFCs for FY23. Funding mix for both large ticket and affordable housing financiers has moved in favour of more stable and longer-term sources. The Reserve Bank of India’s liquidity measures during the pandemic have increased banks’ appetite for funding the segment. This along with higher accretion of public deposits aided by lower bank deposit rates has supported large housing financiers. Whereas, affordable housing financers have been supported through a rising share of funding from the National Housing Bank (‘IND AAA’/Stable) refinance schemes, helping them lower their cost of borrowings and containing any significant margin compression. Incrementally, Ind-Ra believes large financers to protect margins could witness increase in short-term borrowings as the overall interest rate curve is likely to steepen upwards.

The industry has navigated the COVID-19 pandemic with moderate disruptions in collection efficiency and a build-up in asset quality, partially also led by the implementation of the circular on NPA classification. Ind-Ra believes the sector could grow at 13% yoy in FY23 (FY22: 11%) with gross stage 3 numbers increasing to 3.3% from 2.8% in 3QFY22 (FY22: 2.9%), largely due to slippages from the restructured book (FY23: 1.7%; FY22: 2.1%). Additionally, 2% of AUM is supported by lending under Emergency Credit Line Guarantee Scheme which could also see slippages. The broad stage 3 number could rise by 70bp as it was seen in 3QFY22, due to the change in NPA recognition norm.