Saggar sees RE, T&D and roads receiving higher disbursements
The growth prospects for Non-Bank Finance Companies-Infrastructure Finance Companies (NBFC-IFCs) are strong as the Government is focused on the infrastructure sector to revive economic growth, creating a credit growth.
Giving this medium-term outlook on 21 April 2022, Manushree Saggar, Vice President, Financial Sector Ratings, ICRA, expects NBFC-IFCs loan books to grow by 10-12% in FY2023.
“In terms of sectoral breakup, concentration towards the power sector remains higher for IFCs with a share of ~61% of the portfolio as on 31 December 2021 compared to the 52% share of the power sector in banks’ exposure to the infrastructure segment.
This is because of certain NBFC-IFCs, which are specialised institutions solely focused on the power sector.
“Going forward, sectors such as renewable energy, Transmission & Distribution (T&D) and roads would continue to receive higher disbursements as has been the case during the past five years,” Saggar said.
The asset quality trajectory over the past few years indicates receding asset quality pressures for NBFC-IFCs.
Led by a few stressed assets resolutions and recoveries, sizeable write-offs, curtailed incremental slippages, and the optical impact of a growing asset base, the stage 3% has eased to 4.1% (5.8% – ex IRFC) as on 31 December 2021 from the peak level of 7.3% (9.0% – ex. IRFC) as on 31 March 2018.
Aggregate stage 2%, however, remains volatile. This is primarily driven by state sector customers, with instances of delays in debt servicing from time to time, though further slippages to harder buckets have been controlled, she said.
With the improving asset quality and increased provision cover against NPAs, the aggregate solvency indicator (Net stage 3/Net Worth) for the sector has improved considerably over the past three years to the strongest level since March 2016, according to Deep Inder Singh, Vice President, Financial Sector Ratings.
“Thus, with the balance sheets recuperating, the sector is relatively better placed for growth,” he said.
ICRA expects the reported stage 3% to decline by further 25-30 bps supported by pending resolutions and book growth.
NBFC-IFCs, especially Public-IFCs, have reverted to a healthy profitability trajectory with the decline in the share of non-performing loans and in the cost of borrowings, according to ICRA.
This is driving healthy internal capital generation and supporting the capitalisation level. As a result, the capitalisation level remains adequate with a downward bias in the gearing level in recent years, which places the industry well for medium-term growth.
Nonetheless, the capitalisation and solvency levels of IFCs have witnessed a respite only in the recent past.
Hence, the ability of these entities to grow in a calibrated manner without significantly reducing the cushion in the capital over the levels prescribed by the regulator will remain imperative.
Prudent capitalisation is a key mitigant against the risks in NBFC-IFCs portfolios arising out of sectoral and credit concentration and growth above 10-12% may warrant external capital raise to maintain prudent leverage.
The asset-liability maturity profiles have improved as reliance on short-term borrowings has reduced and longer-tenor borrowings have been raised in the recent past amid favourable systemic rates.
“Given the intense competition from Public-IFCs, IDFs and banks, ICRA expects the profitability of Private-IFCs (excluding IDFs) to remain lower than its public sector peers and IDFs, until these entities can ramp up and sustain the non-interest income levels,” said Saggar.
Overall, ICRA expects post-tax RoA of 2.0-2.2% for FY2023 for NBFC-IFCs, supported by stable NIMs and moderation in credit cost. fiinews.com
