Non-convertible debenture (NCD) issuances by non-banking financial companies (NBFCs) and housing finance companies (HFCs) in Q1 (April-June) FY2023 hit a multi-quarter low, with the same being around 28 per cent lower than Q1FY2022 and 65 per cent lower than Q1FY2021, according to ICRA. 

The issuances were lower by around 22-28 per cent compared with Q1FY2020 and Q1FY2019 as well.

The hike in the repo rates by the Reserve Bank of India (RBI) in May and June 2022, along with the elevated inflation prints, have affected investor appetite, the rating agency said in a report.

While the overall issuances were affected by the sharp fall in the participation of public sector undertakings (PSUs) operating in this space, private entity issuances were also down in Q1 FY2023 on a YoY basis.

Commercial paper issuances

At the same time, commercial paper (CP) volumes remained range-bound for the sector over the last two fiscals.

However, the overall CP issuances saw some uptick in the last few months. Incrementally, given the increasing interest rate scenario and competitive pressures, entities may look to increase the share of short-term (ST) funding to support margins, per the agency’s assessment.

Manushree Saggar, Vice President & Sector Head, Financial Sector Ratings said: “Yields for NCDs and CPs have reached the pre-Covid levels, though the spread over the risk-free rate remained quite low vis-à-vis the past.

“The same was driven by the favourable supply-demand environment on the back of limited PSU participation and access to bank funding at favourable rates.”

While these factors may change going forward, the expected merger of HDFC Limited into HDFC Bank would still result in a benign spread scenario for the sector, she said.

“Overall, ICRA has factored in a 100-basis points increase in the weighted average cost for the sector in the current fiscal. While this would impact margins, a favourable credit/provision cost position vis-à-vis the last fiscal would support the profitability of the players,” Saggar said.

The share of bank credit to NBFCs/HFCs moved up steadily over the last 5-6 months as the growth in the assets under management (AUM) resumed, post the setback in Q1 FY2022, per the report.

Further, bank interest rates were favourable vis-à-vis the capital market funding for PSUs and other large and high-rated entities, which led them shifting from capital markets to banks.

Mid-sized entities, targeting certain segments (agriculture, micro and small enterprises, etc), also benefited from the priority-sector lending (PSL) tag for their bank loans and had access to funds at competitive rates from banks.

The agency noted that the scope for further funding from banks would depend on the growth in overall banking credit as bank lending to the sector is high and stood at around 8-9 per cent.

Sell-downs

Going forward, sell-downs (securitisation or direct assignment/DA) may emerge as the key funding source for the sector as asset quality-related concerns have reduced and, the revival in growth observed in the recent past would support the sell-downs, according to the report.

The report noted that sell-down market has expanded over the past few years with the improvement in the share of non-priority sector assets in the overall volumes and diversification in the investor base.

ICRA assessed that retail funding via deposits may also witness a revival with the increase in the interest rate for other funding sources as entities try to leverage their franchise.

AUM growth

The Assets Under Management (AUM) growth for NBFCs and HFCs in FY2022 was somewhat better than ICRA’s expectations, largely driven by the steep growth witnessed in Q4FY2022.

The agency estimated NBFC and HFC credit (excluding infra-financing entities) to have grown by 9.5 per cent in FY2022.

While HFCs grew around 10 per cent, the NBFC retail segment grew by 8.5 per cent and the NBFC wholesale segment by about 12 per cent in FY2022.

ICRA observed that the sharp growth in the NBFC wholesale segment was attributable to the low base and the uptick in credit by large and parent-backed NBFCs, which increased their supply chain, capital market and other corporate exposures.

The agency continues to maintain the growth estimate for FY2023 for NBFCs and HFCs (excluding infra) at 9-11 per cent.

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