NBFCs have enough liquidity, buffers to tackle headwinds in H2 FY22: Ind-Ra

In FY22, Ind-Ra expects growth for NBFCs to be maintained in the range of 9%-10%

India Ratings (Ind-Ra) has upgraded the outlook for retail non-banking finance companies (NBFCs) and housing finance companies (HFCs) from “stable” to “improving” for the second half of current financial year (H2 FY22).

These financial sector firms have adequate system liquidity (because of regulatory measures), along with sufficient capital buffers, stable margins due to low funding cost and on-balance sheet provisioning buffers. This provides enough cushion to navigate the challenges that may emanate from a subdued operating environment.

Such challenges could lead to an increase in asset quality challenges due to the second Coronavirus (Covid-19) wave impacting disbursements and collections for non-banks. The operating environment is dynamic due to the possibility of a third Covid-19 wave, its intensity, regulatory stance and its impact, Ind-Ra said in a statement.

Ind-Ra believes in this environment, there are likely to be meaningful variations in the performance among different asset classes which would reflect on nonbanks depending on their assets under management mix.

NBFCs with a diversified asset mix and non-overlapping customer segments could be considered better placed to navigate operating challenges and may report a less volatile operating performance.

In FY22, Ind-Ra expects growth for NBFCs to be maintained in the range of 9 per cent to 10 per cent, in line with earlier stated expectations, and HFC growth could be maintained at 10 per cent. Incrementally, diversification in product lines remains crucial for non-banks to drive growth during cyclical downturns and have a wider product basket that negates the risk of single asset class franchise.

According to Ind-Ra’s assessment, asset quality for non-banks had deteriorated in FY21. There has been a further build-up in Q1FY22, keeping headline numbers elevated in FY22. The overall stressed book (gross non-performing assets + restructured book) for the top 10 NBFCs rose to 6.4 per cent in FY21 from 5.4 per cent in FY20.

Furthermore, the book’s benefit through the Emergency Credit Line Guarantee Scheme (ECLGS) would be around 5.1%, where there could be slippages post moratorium mostly in FY23.

The segments facing heightened delinquencies for non-banks are two wheelers, passenger vehicles, unsecured & secured business loans, microfinance and commercial vehicles. These segments could remain under pressure for H2 FY22 as business momentum remains subdued. The housing and gold finance segments have been more resilient to the Covid-19 pandemic and would continue to be so over the medium term.

The rating agency said as the overall stress on the loan book is on the rise, loss given default could increase if resolutions take longer than envisaged. Due to the Covid-19 pandemic, there were frequent lockdowns across states, leading to difficulties in the enforcement of hard collateral and the possibility of a resolution through SARFESAI or through debt recovery tribunals.

The reduction in cost due to the lockdowns imposed during the second covid wave would reverse when disbursements increase. However, some reduction can be structural in nature which could persist with the increased use of digital channels.

NBFCs are well capitalised to withstand any impact due to the fluid operating environment. Larger NBFCs have raised equity capital over the past 1-1.5 years and smaller NBFCs were anyways less levered. So, from a stress case perspective, the buffers are adequate to absorb any asset quality shock, it added.