Asset quality headwinds to impact NBFCs performance in FY22: ICRA


New Delhi, Apr 15 (IANS): Domestic retail-assets under management (AUM) are facing asset quality headwinds which will moderate growth in FY21, ratings agency ICRA said.

These headwinds are also likely to affect NBFCs performance in FY22, following resurgence of the Covid-19 pandemic.

"Asset quality pressures because of the Covid-19-related business disruptions unfolded partly in Q3 FY2021 with the 90+ days past due moving up following the closure of the moratorium window in August 2020.

"In line with overall sectoral trends, the 'Retail-NBFC 90+dpd' also inched by about 60 bps in Q3 FY2021 and are expected to remain elevated in Q4 FY2021."

The agency said that asset quality pressures would play out fully in FY22 as the level of economic activities are yet to substantially pick-up over the pre-Covid levels, with risks further compounded by recent rise in infection rates.

"While NBFCs can proceed with the overdue recoveries post lifting of the Supreme Court order on the NPA classification in March 2021, ICRA notes that performance of most of the key target asset or borrower segments continues to be sub-optimal, which would impact realisations, leading to higher loan losses."

Besides, the ratings agency cited that entities have augmented their provisions steadily since Q4 FY20 and are currently carrying provisions of more than 50 per cent of the pre-Covid levels, with the same expected to be maintained at least for a few more quarters in view of the current uncertainties.

A.M. Karthik, Vice President, and Sector Head, Financial Sector Ratings, ICRA said: "Restructuring expectation averages around 2.6 per cent presently and we expect reported 'Gross Stage 3' to increase steadily by about 50-100 bps by March 2022, as a base case; and could inch up further if the impact of the pandemic continues for longer period leading to lockdowns or other tighter restrictions."

Besides, high credit cost, expected increase in the cost of funds and competitive pressures; and slower AUM growth would impact earnings performance which would result in the return on average assets being 30 per cent lower than pre-Covid levels in FY2022 and similar to FY2021.

ICRA expects the 'Retail-NBFC AUM', which is estimated to be about Rs 10 trillion as of December 2020, to register a modest growth of about 3-5 per cent in FY2021 as pent-up demand, post the lockdown, led to some revival in segments - namely gold, microfinance, two-wheelers, and tractors.

However, some of the key asset segments, namely commercial vehicles (CVs), LAP and SME, together accounting for bulk of the overall 'Retail-NBFC AUM', continue to underperform.

"Growth is expected to revive to about 8-10 per cent in FY2022. Growth in FY2022 is envisaged to be driven by the improvement in demand from all key target segments vis-a-vis FY2021. Some of the key segments which would bolster growth include gold loans, personal credit, rural finance and microfinance."

"Growth in the vehicle finance business loans including LAP and other commercial lending segments, which are closely linked to economic activities, is expected to take longer to register a reasonable revival."

Nevertheless, it added that growth would be contingent upon access to adequate funding lines - incremental bank loans, considering their high sectoral exposure to the segment, remain to be seen and would in turn depend on overall bank credit growth.

"Mutual funds (MFs) registered some improvement in their exposures to NBFCs in the recent past and the sustainability of the same is critical. Improvement in securitisation volumes in FY2022 after a sharp contraction in FY2021 and access to funding from other sources, including retail or overseas lenders or investors, would be key for the sustainable growth of the sector."

"Considering the increased uncertainties regarding the operating environment the 6-month extension of 'on-tap TLTRO' and PSL categorisation of bank credit to NBFCs for on-lending to specific segment augurs well for the sectoral health in the near-term."

In addition, the capital structure is expected to remain adequate.

"While some entities raised fresh equity in FY2021, ICRA notes that moderate growth expectations even in FY2022, notwithstanding the reduction in internal generation because of the weakening in the earnings performance, would not necessitate any significant fresh capital raise in the near term."

  

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Title: Asset quality headwinds to impact NBFCs performance in FY22: ICRA



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