NBFC. NBFCs assets to improve on tailwinds, says Crisil Ratings

Assets under management (AUM) of non-banking financial companies (NBFCs) is set to grow 8-10 per cent to about ₹30-lakh crore in FY2023, riding on two tailwinds — improving economic activity, and strengthened balance sheet buffers, according to CRISIL Ratings.

This compares with an estimated growth of 6-8 per cent this fiscal (to about ₹27 -akh crore) and 2 per cent last fiscal (about ₹25-lakh crore AUM outstanding).

However, the credit rating agency cautioned that NBFCs face three headwinds — competition from Banks, expected increase in gross non-performing assets and funding access, which is yet to fully normalise.

The agency noted that intensifying competition from banks, flush with liquidity, that have sharpened focus on retail loans.

It assessed that GNPAs are expected to increase, mostly because of the revision in recognition norms and, to some extent, due to slippages from the restructured book.

Gurpreet Chhatwal, Managing Director, CRISIL Ratings Ltd, said: “Many NBFCs have built higher liquidity, capital and provisioning buffers in the recent past.

“That, combined with improving economic activity, puts them in a comfortable position to capitalise on growth opportunities. However, competition from banks will intensify.”

Asset quality worries have also manifested due to recent regulatory clarifications, and uncertainty over the performance of the restructured book.

While home loans and gold loans will be the least impacted, unsecured, and micro, small and medium enterprises loans will bear the brunt.

Chhatwal observed that net-net, growth will be driven by NBFCs with strong parentage and better funding access in the two largest segments — home loans and vehicle finance.

CRISIL noted that organic consolidation is also underway with larger NBFCs gaining share.

In three fiscals through 2021, the market share of the top 5 NBFCs has risen 600 basis points (bps) to 46 per cent.

The agency said the ability to identify niches that cater to the relatively difficult-to-address customer segments and asset classes will fuel long-term growth for the sector.

CRISIL expects retail loans to see reasonably broad-based growth in the current and next fiscals supported by pick-up in demand and consequently underlying sales.

Gold, home and unsecured loans should clock the fastest growth rates. On the other hand, wholesale credit would continue to degrow as platforms such as alternate investment funds gain currency.

Stressed assets

The agency expects GNPAs to increase by 25-300 basis points (bps) based on asset class because of the new recognition norm.

However, the increase in GNPAs because of the revised recognition norms will be largely an accounting impact because, given the improving economy, the credit profiles of borrowers are not expected to deteriorate. Consequently, ultimate credit losses are not expected to change significantly.

CRISIL said the performance of the restructured book is a key monitorable.

The agency noted that while there has been across-the-segment improvement in the monthly collection efficiency ratio (MCR) of NBFCs for the quarter ended September 2021, the quantum of restructuring done under the RBI Resolution Framework 2.0 is more than last year.

Since this mostly involved offering moratorium, the performance of this book after moratorium is monitorable.

Overall, fragile assets (GNPAs + slippages due to the impact of regulatory norms and from the restructured book) are seen at ₹1.3-1.6 lakh crore, tantamount to 5-6 per cent of the industry’s AUM as of March 2022.

This does not factor in the impact of a third wave of Covid-19, especially the just-discovered Omicron variant, which is a risk factor.

Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings Ltd, said, “While there may be apprehensions about rising reported GNPAs, additional disclosures by NBFCs around underlying delinquency profiles and collection efficiencies can help allay them.

“Those with low leverage, high liquidity and strong parentage are expected to benefit from better funding access at optimal rates. For the rest and especially mid-sized and smaller players, co-lending, securitisation, or other partnerships with banks will facilitate a funding-light business model.”