INDIA: The second wave of Covid-19 infections has impacted non-bank [NBFC+HFC] business sentiments for Q1FY2022, however a rebound in Q2 and a steady uptick during H2FY2022 could result in the sectoral asset under management (AUM) growing by about 7-9% vis-a-vis about 4% growth (provisional) for FY2021. As per an ICRA note, the second wave of the pandemic is expected to result in a disbursement contraction of about 50-60% in Q1FY2022 vis-a-vis Q4FY2021. However, the rating agency expects the disbursements to revive healthily in the latter part of the year and register a 6-8% Y-o-Y growth vis a vis the 11-12% Y-o-Y declines witnessed in the previous two fiscals. Prior to the onset of Covid 2.0, the sector witnessed a robust recovery in disbursements since Q2FY2021, with volumes reaching above pre-Covid levels in Q3 and Q4FY2021, supported by the pent-up demand.
Giving more information, A M Karthik, Vice President, Financial Sector Ratings, ICRA Limited says, “Entities would also be faced with increased asset quality pressures as prolonged stress in the operating environment would push the gross stage3/NPAs by about 50-100 bps in the current fiscal; it increased by about 40-50 bps during the last fiscal. About 30% of the non-bank exposure is deemed to be in the risky segments namely, real estate, personal credit, microfinance, unsecured SME, and segments of commercial vehicle and passenger vehicle financing, which were more severely affected by the pandemic. Geographically, the large states- Maharashtra, Karnataka, and Tamil Nadu, which accounted for ~40% of the sectoral credit, were amongst the severely affected states by the second wave and witnessed tighter restrictions.”
The reported Gross NPAs/Stage3 as of March 2021 was lower than anticipated, as loan write-offs increased sharply; write-offs as a proportion of AUM was about 70 bps higher for FY2021 vis-a-vis the previous year. ICRA however notes that the provision buffers carried by non-banks are about 100 bps higher than pre-covid levels notwithstanding the write-offs affected in the last fiscal; this partly would offset the asset quality pressure for the sector.
Restructuring during FY2021 was about 1.5% of the AUM, which was lower than previously expected. However, the second wave of infections, and the lack of a comprehensive forbearance (loan moratorium), unlike the last fiscal, could revive demand for loan restructuring in the current year.
Non-bank earnings have been under pressure largely because of the increase in credit cost; Profit before tax as a proportion of managed assets was about 2.3% for FY2021 vis a vis about 3.1% in 9MFY2020. Earnings are expected to remain under pressure in FY2022 and similar to FY2021 levels, as credit cost is expected to remain high and similar to the last fiscal, in the base case scenario.
“Capitalisation and liquidity profile remains a silver lining for the sector. The sector would require an estimated Rs. 2.0 trillion of additional funding for the envisaged growth. Funding to remain a key differentiator among entities. While ICRA continues to have a negative outlook on the sector, it would review its position after assessing the additional stress because of the second wave of the pandemic. The emergence of any further waves of infections and its consequent impact on the performance of NBFCs would remain key sensitivity in the near term” adds Karthik.
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