ICRA has revised the assets under management (AUM) growth outlook of retail non-banking finance companies (excluding housing finance companies) for the current fiscal to 5-7 per cent from 8-10 per cent in view of the muted first-half performance.
The rating agency cautioned that the growth outlook would be exposed to the downside risk in case of significant disruptions caused by the new wave of Omicron infections in Q4 (January-March) FY2022.
“At present, while the infections rates remain high, the operational disruptions have been quite limited. Measures taken by the regulator to strengthen the structural, regulatory and supervisory framework for the sector, especially the tighter non-performing advances (NPA) recognition/upgradation norms, could lead to an increased focus on internal controls, which can, in turn also impact the sectoral growth,” ICRA said in a report.
AUM of the retail-NBFC (excluding housing finance companies) grew by less than 1 per cent in H1 (April-September) FY2022. After shrinking by about 2 per cent during Q1 (April-June) FY2022, the retail-NBFC AUM rebounded from the low base of June 2021 and grew sequentially by about 2.8 per cent in Q2 (July-September) FY2022.
Supply-side constraints
“Apart from the various regulatory changes over the last 3-4 months (other key regulations include – scale-based regulations, prompt corrective action framework for NBFCs, etc) and a muted H1FY2022, we note that some of the key segments of the retail-NBFCs, especially vehicle finance, are faced with supply-side constraints, which could pull-down growth vis a vis our expectation, even if the demand remains less impacted by the new wave of infections. AUM growth is expected to revive to 8-10 per cent in FY2023,” said AM Karthik, Vice President, Financial Sector Ratings, ICRA,
ICRA noted that stage-3 (credit-impaired) assets moderated in Q2 FY2022 from the peak in Q1; it had increased significantly by about 180 basis points (bps) in Q1 FY2022, the sharpest in the recent past.
As of September 2021, stage-3 stood at 5.8 per cent was still about 120 bps over the March 2021 level. ICRA expects it to settle at about 5.3-5.8 per cent (net of write-offs) by the end of this fiscal.
The overall write-offs in Q1 and Q2 FY2022 remained high at 2.4 per cent (annualised) of the AUM, similar to FY2021, as per the agency.
Provisions remained high, notwithstanding some moderation in Q2 FY2022, thereby providing buffer for incremental risks/uncertainties. As of September 2021, provisions were about 1.7 times of the December 2019 level.
Risk profile of NBFCs
In view of the tightened NPA recognition and upgradation norms notified by the Reserve Bank of India (RBI), ICRA observed that the gross stage-3 (GS3) reporting vis-à-vis NPA reporting to the RBI could see increased divergence. It believes that the same would not affect the risk profile of NBFCs in the near term.
The agency noted that provisions under IndAS are generally higher than the income recognition, asset classification (IRAC) norms and were further augmented because of the pandemic.
Thus, no significant incremental impact is envisaged on the near-term profitability or capitalisation profile. However, the pressure would be felt over the medium term if the forward flow from the stage-2/special mention account (SMA) category is not contained.
“The increase in the restructured book has been on expected lines as it doubled over the March 2021 level and stood at 4.5 per cent of the AUM. Of the total outstanding restructured book of retail-NBFCs, about 70 per cent was done in H1 FY2022,” Karthik said.
As restructuring in the current fiscal was largely done in Q2 FY2022, generally with a moratorium of 3-6 months and, as the commencement of repayments from these accounts, in Q3/Q4 FY2022, coincides with the new wave of infections, any significant disruption would impact the asset quality of the sector, he added.
ICRA expects the credit costs in FY2022 to be lower than last year’s level in the base case. The performance of the restructured book, however, would be key as anecdotal evidence suggests that the collections in this book remain weaker, it said.
The agency opined that operating expenses are expected to increase in line with the growth in business and as the entities tighten their internal processes in view of the various regulatory changes. Further, the competition from the banks and the likely increase in the borrowing rates could impact margin.
Referring to entities carrying surplus liquidity on their balance sheet at present, the agency said some unwinding of the same could happen as the operating uncertainties because of the pandemic eases, providing support to the margins.