HFCs to witness better growth prospects, revival in profitability in FY 2023: ICRA
Due to the disruptions induced by the second wave of the pandemic, the housing portfolio did not witness sequential growth in Q1 FY2022, though the Y-o-Y growth was better than FY2021, ICRA said./Representative image |
The second wave of the pandemic impacted disbursements of Housing Finance Companies (HFC)s in Q1 FY2022. However, the same was followed by a sharp recovery in Q2 FY2022, according to ICRA Ratings.
The on-book portfolio of non-banking financial companies-housing finance companies (NBFC-HFC) in India is estimated at Rs. 11.6 lakh crore as on September 30, 2021 registering a Y-o-Y growth of 9 percent (7 percent adjusted) in H1 FY2022.
Going forward, the growth trend is expected to continue driven by healthy demand in the industry, increasing level of economic activity and increasing vaccination in the country. There would, however, be downside risk in case of significant disruptions caused by the new wave of infections in Q4 FY2022 or future waves if any.
Further, the measures taken by the regulator to strengthen the structural, regulatory and supervisory framework for the NBFCs, especially the tighter non-performing advances (NPA) recognition/upgradation norms, could lead to increased focus on internal controls, which can, in turn can also impact sectoral growth, ICRA said.
Second wave disrupts housing portfolio
Sachin Sachdeva, Vice President and Sector Head, Financial Sector Ratings, ICRA, says, “Because of the disruptions induced by the second wave of the pandemic, the housing portfolio did not witness sequential growth in Q1 FY2022, though the Y-o-Y growth was better than FY2021 given the low growth in Q1 FY2021. Disbursements picked up pace in Q2 FY2022 and the portfolio registered both Q-o-Q and Y-o-Y growth.
"Given the last three years of moderation in growth, the pent-up demand is expected to help the industry witness growth in the portfolio in FY2022 with the trend expected to continue in FY2023 as well. However, this would be subject to the impact of the ongoing third wave. Nevertheless, initial trends, as discussed with industry players, indicate limited impact of the third wave on the industry’s operations. Hence, ICRA retains its growth estimate of 8-10 percent for the on-book portfolio of HFCs in FY2022. Further, HFCs on-book portfolio is estimated to grow by 9-11 percent in FY2023.”
Decline in collection efficiency
As for the gross NPAs, the second wave of infections and the prolonged weakness in the operating environment challenged the recovery since Q3 FY2021, which led to a decline in collection efficiency (CE) and hence deterioration in the asset quality metrics in Q1 FY2022. Nevertheless, the industry saw a sharp recovery in CE in Q2 FY2022 and the gross NPAs (GNPAs) reduced by around 50 basis points (bps) in Q2 FY2022.
Stress on cash flows
The stress on cash flows of borrowers caused by the pandemic also renewed demand for restructuring and the industry’s outstanding restructured portfolio increased to around 2.3 percent (adjusted for repeat restructuring, recoveries and slippages) of assets under management (AUM) as on September 30, 2021 from around 1.1 percent as on March 31, 2021. ICRA expects the restructured book to reduce slightly, driven by recoveries and slippages, to around 2.0-2.1 percent of the AUM by March 31, 2022.
“Though the continuing improvement in CE augurs well for the industry, we expect the asset quality metrics to remain weak in FY2022 given the relatively sticky nature of GNPAs in the sector, expected slippages from the restructured book, the third wave of the pandemic and the impact of tighter regulations regarding upgradation of NPAs. ICRA has increased its estimate of reported GNPAs to 3.6-3.8 percent as on March 31, 2022 compared to earlier estimate of 3.3-3.6 percent as on March 31, 2022. Thereafter, some recovery is expected in FY2023 with GNPA estimates of 3.2-3.5 percent as on March 31, 2023,” added Sachdeva.
HFCs maintain healthy on-balance sheet liquidity
From liquidity perspective, the HFCs have been maintaining healthy on-balance sheet liquidity for the last few quarters and have gradually reduced their reliance on short-term funding sources like CP, which has helped improved asset liability mismatches in the near-term buckets. They are expected to maintain healthy liquidity in the near-term given the challenging environment.
Sachdeva said, “The expected elevated credit costs are likely to keep the profitability moderate in FY2022, similar to FY2021. Nevertheless, it is expected to improve further in FY2023, close to the pre-Covid level. Optimistically, if the collection efficiency trends post a steady and healthy revival and if slippages remain contained, then profitability may also benefit from reversals in provisions.”
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