India Ratings and Research (Ind-Ra) has changed the outlook to improving from stable for retail non-banking finance companies (NBFCs) and housing finance companies (HFCs) for 2H FY22.

Adequate system liquidity because of regulatory measures along with sufficient capital buffers, stable margins due to low funding cost and on-balance sheet provisioning buffers provide enough cushion to navigate the challenges, it said. The challenges may emanate from a subdued operating environment, leading to an increase in asset quality challenges due to the second COVID wave impacting disbursements and collections for non-banks.

Ind-Ra said the operating environment is dynamic due to the possibility of a third COVID wave, its intensity, regulatory stance and its impact.
In this environment, there is likely to be meaningful variations in the performance among different asset classes which will reflect on non-banks depending on their assets under management mix.

NBFCs with a diversified asset mix and non-overlapping customer segments can be considered better placed to navigate operating challenges and may report a less volatile operating performance.

In FY22, Ind-Ra expects growth for NBFCs to be maintained in range of 9 to 10 per cent in line with earlier stated expectations, and HFC growth can be maintained at 10 per cent.

Incrementally, Ind-Ra said diversification in product lines remains crucial for non-banks to drive growth during cyclical downturns and have a wider product basket that negates the risk of single asset class franchise