NBFCs’ Focus To Shift to Growth in FY23 as Operating Environment Normalises: Report
Moneylife Digital Team 02 March 2022
While maintaining a neutral sector outlook and a stable rating outlook for non-banking finance companies (NBFCs) for FY22-23, India Ratings and Research (Ind-Ra) says in the absence of any adverse event, NBFCs would see normalisation of business activities. NBFCs have faced challenges in the past few years after the default by Infrastructure Leasing & Financial Services Ltd (IL&FS), leading to liquidity challenges and the COVID-19 pandemic. 
In a note, the rating agency says, “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 the  pandemic would be a drag on the operating performance.”
The sector has been facing increased regulatory oversight and pushes towards convergence with banks through various measures such as scale-based regulation, realignment in asset quality classification and prompt corrective action (PCA) norm. However, the incremental impact of the notification on NPA (non-performing assets) recognition will be moderate as the maximum impact has already been seen in the third quarter (3Q) of FY21-22 figures, and NBFCs are holding adequate provisions, Ind-Ra says.
Ind-Ra expects NBFCs to maintain loan growth of around 14% in FY22-23, with FY21-22 growth closing at 7%-8%. “We believe FY22-23 could be a year of normalcy in disbursements. 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 economic recovery.” 
According to the rating agency, the gold loan segment could see moderate growth in tandem with gold prices and opening up of other financing avenues for borrowers. 
It says, 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, while 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. Tractor financing could remain stable, with growth in line with the agriculture sector’s and government’s spending in rural areas. 
Ind-Ra says that supply chain financing, where the obligations of lenders remain on strong anchors, could gain traction in this aspect. 
According to the rating agency, the interest rate would inch up and would require recalibration across funding avenues. 
However, it says, "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,” Ind-Ra added.
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. 
Ind-Ra says it believes as market confidence becomes stronger, a larger part of borrowings for large non-banks would move towards capital markets. “There could be 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.”
While credit cost is likely to normalise, asset quality headline number could remain elevated, the rating agency says.
Ind-Ra expects loan growth in FY21-22 and FY22-23 to be around 8% and 14%, respectively, for its rated NBFCs (excluding government entities). It says, “NBFCs’ stage three assets could increase to 6% by FY22-23 from 5.6% in 3QFY21-22, 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.” 
The rating agency believes the segments facing heightened delinquencies for non-banks are the ones where customer profiles could be most vulnerable such as two-wheelers, passenger vehicles, unsecured business loans, microfinance and heavy commercial vehicles. 
“Among these asset classes, the vehicle finance segment could see a revival in FY22-23 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,” it added.
Overall, Ind-Ra says NBFCs have the required resources to take advantage of the improved operating environment to grow their franchisee, provided there are no further waves of the pandemic.
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