NBFCs’ profitabilty is seen improving 40-50 bps in FY23, reaching pre-Covid levels, on the back of higher AUM growth, stable NIMs and lower credit costs.

Credit costs have been controlled as banks have not passed on the entire cost increase to NBFCs, whereas they have been able to pass on these limited rate hikes to their borrowers, ratings agency ICRA said.

“With on-balance sheet liquidity likely to be consumed to some extent for business growth, the negative carry would also reduce, thus supporting NIMs,” it said, adding that asset quality-related headwinds have also waned.

ICRA expects NBFCs to report RoMA (return on managed assets) of 2.6-2.9 per cent for FY23, with 49 per cent entities (by volume) seeing an improvement of over 50 bps.

The NBFC sector is expected to grow 10-12 per cent in FY23, led by 12-14 per cent growth for retail NBFCs and 10-12 per cent for HFCs, it said, pegging FY24 growth at 10-12 per cent.

AUM growth

Growth is expected to be broad-based, led by microfinance and personal loans. Vehicle finance loans are also expected to report higher growth numbers supported by an improvement in the operating environment.

Most NBFCs have revised FY23 growth estimates upwards, with nearly 63 per cent (by value) and 67 per cent (by number) expecting AUM growth of over 15 per cent, ICRA said.

“Disbursements of NBFCs (excluding Infra-NBFCs) and HFCs remained higher than pre-pandemic levels for three consecutive quarters, indicating that the industry has finally come out of the long period of trough,” said Manushree Saggar, Vice-President and sector head, financial sector ratings.

Asset quality

Rising interest rates pose some challenges for long tail products such as housing loans, but the impact is likely to be manageable, the ratings agency said, adding however, that loan write-offs continue to be elevated at 2.1 per cent for NBFCs and at 0.5 per cent for HFCs in H1FY23.

On the other hand, the share of restructured loans has remained lower-than-anticipated at 2 per cent of total AUM as of September, and slippages from this portfolio have been controlled.

“Majority stress from the restructured book is likely to be absorbed in FY23 and slippages are expected to remain rangebound,” ICRA said, adding that NBFCs are likely to report some moderation in asset quality indicators and credit costs by March 2023.