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Under moratorium as a consequence of forbearance provided by the Reserve Bank of India (RBI) due to the pandemic, a sizeable portion of the restructured book of non-banking financial companies (NBFCs) has slipped into non-performing assets (NPA) in the first half (H1) of 2022-23 (FY23). This has resulted in the asset quality of the sector not improving at the pace it was expected to happen.
According to ICRA’s assessment, 24 per cent of the opening standard restructure book of NBFCs as of March this year has slipped into NPAs, while 17 per cent are making repayments.
In the case of housing finance companies (HFCs), over 10 per cent of this book has slipped into NPAs, while 6.4 per cent are making regular repayments.
“Slippages from the restructured book increased in H1FY23 as most of the restructured accounts moved out of the moratorium period. This was a key reason for a gradual improvement in asset quality performance,” observes the rating agency.
However, it is expected that stress from restructured assets will largely be absorbed by the second half of FY23.
The asset quality of the shadow lenders has been improving steadily since December 2021, on the back of higher collection, lower-than-anticipated share of the restructured portfolio, estimated at 2 per cent of the total assets under management (AUM) as of September 2022, and higher write-offs.
Write-offs remained elevated at 2.1 per cent for NBFCs and 0.5 per cent for HFCs in H1FY23.
“While rising interest rates pose some challenges for long-tail products, such as housing loans, the impact is likely to remain manageable. Overall, a major stress from the restructured book is likely to be absorbed in FY23 and slippages are expected to remain range-bound. Therefore, non-banks are expected to report some moderation in reported asset quality indicators and credit costs by the end of March 2023,” says the rating agency.
Meanwhile, the profitability of shadow lenders is expected to improve from the levels seen in 2021-22 and will likely touch pre-Covid levels in the current financial year (FY23), aided by healthy growth in AUM, moderation in asset quality, and controlled credit costs.
Net interest margins (NIMs) of these lenders are expected to be stable, in stark contrast to what was largely anticipated, given interest rates in the economy have gone up substantially in the past few quarters. This is because banks, which are the largest funding source for NBFCs, have not yet passed on the entire rate hike to these lenders, even as NBFCs have passed on limited interest rate hikes to their borrowers. With on-balance sheet liquidity likely to be consumed to some extent for business growth, the negative carry would also reduce, thus supporting NIMs.
“Stable NIMs, along with moderation in credit costs, will support improvement in profitability indicators for non-banks. These entities are expected to report a return on managed assets of 2.6-2.9 per cent for FY23,” says R Srinivasan, vice-president and sector head, financial sector ratings, ICRA.
The AUM of NBFCs is expected to go up to Rs 44 trillion by March 2023 and Rs 49 trillion by March 2024, with retail asset classes of NBFCs growing at 12-14 per cent during this period, led by microfinance and personal loans.
Disbursements have shown considerable improvement in the past three quarters as they remained higher than pre-pandemic levels. While demand currently remains firm, uncertain global macroeconomic conditions could pose some downside risks towards the end of FY23 or early 2023-24, adds the rating agency.
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