Domestic rating agency India Ratings on Tuesday upgraded its outlook on the non-bank lenders to "neutral" from "improving" on better collection efficiencies and asset growth in the sector.
It, however, said that liability management is key for managing margins and loan growth for non-bank finance companies (NBFCs) and housing finance companies (HFCs).
The agency said that with the onset of normalcy in lending, the on-balance sheet liquidity would also normalise, negating the impact of the rising cost of funds, thereby protecting margins to a certain extent.
In the mid-year outlook on the sector, it said that a lower credit cost for 2HFY23 would aid profitability during the fiscal.
Higher inflationary pressure on borrowers and interest rates may deter demand normalisation in the near term but the festive season demand could support the baseline credit offtake, it said.
On the securitisation front, a major source of balance sheet management for lenders, the agency said it has witnessed a strong asset performance in the first half of FY23, which leads it to give a "stable" rating outlook for outstanding transactions in the second half of the fiscal.
It expects securitisation volumes to reach pre-COVID levels, subject to stabilised market sentiments.
The non-bank regulatory framework has become increasingly aligned with that of banks with the introduction of the prompt corrective action framework and the revision of non-performing asset (NPA) recognition norms, the agency said, adding that this will further aid transparency in disclosure standards and reporting alignment with banks.
The agency said it expects NBFCs (including HFCs) to report around 14 per cent growth in AUM (assets under management) in FY23.
"GNPA could rise moderately to 5 per cent in FY23 from 4.6 per cent in Q1FY23 for NBFCs and to 3 per cent from 2.7 per cent for HFCs, largely due to the new NPA recognition norms setting in from October 1, 2022; however, credit cost would remain stable due to the adequate provisions built-in," Jinay Gala, its associate director, said.
In terms of asset classes, commercial vehicles should see a gradual recovery with the collection efficiency on an improving trend but the inflationary pressure on borrowers' income profiles could pose debt servicing challenges, leading to pressure on softer delinquencies, it said.
On an overall basis, the agency said non-banks would normalise in H2FY23, with the focus being on margin stability in the rising interest rate environment and gathering adequate liquidity for managing growth.
There could be a rise in short-term borrowings to maintain the cost of funds; however, it needs to be calibrated with managing asset-liability risk, it added.
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