NBFCs sector will see 50-100 bps increase in 90+dpd in FY22: Icra

The asset quality of non-banking finance companies will see elevated stress levels in the near term due to the second wave of the pandemic, but the stress will subside subsequently as collection efficiencies improve and restructuring picks up, says rating agency Icra.

The spike in stress in the asset quality of the shadow banks stems from a combination of factors. Unlike last year, there was no moratorium, which prevented the movement in the non-performing asset quality cycle. Secondly, the collection efficiency was severely impacted because of the restrictions imposed to spread the check of the virus.

According Icra's assessment, the 90-days-past-due (dpd) bucket of the NBFCs segment will inch up by 50-100 basis points (bps), net of recoveries, and write-offs, in the current fiscal. In FY21, the 90 dpd increased by 30-40 bps over March 2020 levels as collections had improved steadily and reached pre-covid levels in Q4FY21. Further, loan write-offs during Q3 and Q4 of FY21 and extended restructuring to their borrowers, containing overdues.

Post Q4, collection efficiencies of the non-bank lenders dipped again in April-May. While large housing finance companies saw a lower impact on their collection efficiencies, NBFCs lending to segments such as vehicle finance, business loans, and microfinance, saw their collections decline by about 20-25 per cent in May 2021 compared to Q4FY21.

However, since then the collection has improved. “Sustenance of the same in the subsequent months and no further impediments in the revival trends would be crucial from an asset quality perspective”, said A M Karthik, Vice President, Financial Sector Ratings, Icra.

The restructuring book of NBFCs is also expected to rise and may touch 4.1-4.3 per cent by March 2022 as against 2.2 per cent as of March 2021. Similarly, for HFCs, the restructuring book is expected to go up to 2-2.2 per cent by March 2022 as against one per cent as of March 2021. The overall sectoral restructured book is therefore expected to double to 3.1-3.3 per cent by March 2022 vis-a-vis 1.6 per cent in March 2021.

Further, the sectoral assets under management (AUM) are expected to grow at 7-9 per cent in FY22 bolstered by the growth in the NBFC retail credit and HFCs, which is expected to be about 8-10 per cent, while NBFC wholesale credit growth would remain muted.

The rating agency has maintained its negative outlook on the sector, however, the capital position of the lenders, augmented by slower credit growth and an increase in liquidity. According to ICRA, the sector would require Rs two trillion of additional funding, apart from refinancing existing maturities, in FY22 to meet their growth requirements.