The assets under management (AUM) of NBFC-Retail are estimated to grow by about 5-7 percent in FY2022 and by 8-10 percent in FY2023, while HFC AUM would expand by 8-10 percent and 9-11 percent respectively. At the same time, NBFC-wholesale AUM would continue to shrink in the current fiscal and stabilise in FY2023, as per a recent report published by ICRA on the NBFC & HFC sector.
While the disbursement and AUM trends have revived in Q2FY2022 and Q3FY2022, the trend is likely to continue in Q4 of FY2022 as impact of the third wave of the pandemic was limited. However, the setback witnessed in Q1, on account of the COVID-related disruptions is weighing in on the overall growth in the current fiscal.
ICRA notes that the disbursement growth would have to remain healthier for a sustained AUM growth.
Manushree Saggar, Vice President, Financial Sector Ratings, ICRA, says, “Within the NBFC-Retail segment, personal credit, microfinance and gold loans are likely to be the primary growth drivers as other traditional asset segments-vehicle finance and business credit are still facing headwinds because of supply constraints and asset quality concerns. For HFCs, the growth is expected to be driven by the housing book while lenders have adopted a cautious approach towards non-housing segment.”
The reported gross stage 3 was impacted for the sector as some entities aligned their reporting in line with the RBI clarification on NPAs of November 12, 2021.
While RBI has provided an extension in its applicability, entities which have aligned are not expected to revert.
The reported asset quality indicators have also been supported by sizeable write-offs. Incrementally, performance of the restructured book, would remain a monitorable in the near term, as sizeable restructuring was undertaken in H1FY2022 and typically had a moratorium of 3- 6 months.
In line with the trend seen over last two years, liquidity (on-B/S and undrawn sanctions) for the sector has remained adequate, with entities typically maintaining a coverage of their next three-month repayments. Also, lower AUM growth in FY2022 warranted limited incremental funding requirement as compared with previously envisaged levels.
As per ICRA’s estimates, NBFC & HFCs would require Rs.1.8-2.2 trillion of incremental fresh funding for meeting its growth requirement in FY2023, assuming entities continue to maintain their liquidity buffers.
As for borrowing mix, increase in the share of fixed deposits and other sources (including ECBs) indicate diversification focus by these entities, even if it was at a higher cost. Nevertheless, bank funding continues to the mainstay funding source especially for the non-deposit taking NBFCs.
As for earnings, HFC yields moderated in view of the competitive pressures while NBFC yields remained rangebound. Notwithstanding the higher balance sheet liquidity maintained by these entities, the net interest margins were supported by favourable cost of funds.
While operating expenses moved up with revival in business volumes and increased focus on collections and system augmentation; credit costs are past their peak witnessed during the pandemic. Thus, net earnings for the current fiscal would show an improvement over the last fiscal and would improve to near pre-covid levels in the next fiscal.
“ICRA expects the NBFC and HFC return on managed assets (ROMA) to reach near per-covid levels of 2.7-2.9 percent and 1.8-2.0 percent in FY2023. For FY2022, RoMA is estimated to be higher than FY2021 at 2.2-2.4 percent and 1.6-1.8 percent respectively. Going forward, managing operating efficiencies, especially for NBFCs and, control on incremental slippages, especially from the restructured book, would remain a key monitorable,” Saggar added.