ICRA upgrades outlook on infra finance firms to 'positive' from 'stable'

Rating agency cites sector's improved solvency profile, loan book growth and earnings

Rating agency ICRA on Thursday upgraded the outlook for infrastructure finance companies (NBFC-IFC) from “stable” to “positive” as investments and asset quality in the sector improved.

The revised industry outlook reflects expectation that the enhanced performance witnessed in FY23 will continue in FT24. This is in backdrop of improved solvency profile, loan book growth in the near term and better asset quality and earnings profile, said ICRA in a statement.

NBFC-IFCs books are expected to grow 10-12 per cent in FY24, supported by government investments in infrastructure to revive economic activity. Given the internal capital generation, the need for external capital remains low. However, growth above 12 per cent may warrant external capital raise to maintain the leverage, ICRA said. The segment is dominated by state-owned entities like PFC, REC, IIFCL and a few private sector firms like Tata Cleantech, Aseem Infrastructure Finance and Kotak Infrastructure Debt Fund.

The overall infrastructure credit (including banks and non-banks) registered an annualised growth of 8.0 per cent in April-December (nine months of FY23) aided by a sharp pickup in Q3 FY23, bucking the trend of the previous 18 months. NBFC-IFCs grew in line with the system and maintained their market share at around 54 per cent as on December 31, 2022.

The increased demand has coincided with the period during which NBFC-IFCs witnessed receding asset quality pressure. Asset quality improved through resolutions/recoveries, sizeable write-offs, and curtailed incremental slippages. Gross non-performing assets (NPAs) declined to 3.4 per cent at the end of March 2022, from the peak of 6.8 per cent at end March 31, 2018.

The asset quality indicators moderated further to 2.7 per cent as on December 31, 2022. Further, with the ~70 per cent provision cover, the solvency profiles of the issuers are comfortable.

The gross stage 3 assets are expected to moderate further by 10-30 basis points (bps) in FY2024, supported by limited slippages and growth in the book, ICRA said.

“NBFC-IFCs are expected to benefit from the credit demand generated by the Central Government’s ambitious targets under the National Infrastructure Pipeline (NIP) and ICRA expects them to grow by 10-12% in FY2024,” said Manushree Saggar, vice president at ICRA.

This, coupled with limited incremental slippages, is expected to lead to these NBFC-IFCs reporting low asset-quality indicators (lowest in last six years) in FY23 and FY24.