A steady decline in non-performing loans noted
Given the Covid-induced disruption, the trajectory of total infrastructure credit in India (banks and infrastructure finance non-bank companies) slowed to 1% sequential growth in H1 FY2021, according to a report by ICRA Ltd.
While the infrastructure credit grew 7% in FY2020 (19% in FY2019) to Rs.22.5 lakh crore as on 31 March 2020, it increased marginally to Rs.22.6 lakh crore as on 30 September 2020.
“The tepidness in infrastructure credit in H1 FY2021 was primarily due to the sequential de-growth (10%) in banking sector credit to the infrastructure segment, though NBFC-IFCs continued to grow at a modest sequential pace of 12% in this period. However, the growth was majorly led by disbursements related to liquidity package announced by government for cash-strapped discoms,” Manushree Saggar, Vice President and Head – Financial Sector Ratings, ICRA, said on 4 Jan 2021.
The share of NBFC-IFCs in infrastructure credit has increased to 53% as of 30 September 2020 from about 38% five years ago. The decline in share of banks during past few years was largely attributable to the conversion of their exposures to state distribution companies into bonds and subdued lending amid asset quality issues and capital constraints.
At the same time, portfolio for NBFC-IFCs continued to grow though largely at the back of growth in the public sector NBFC-IFCs. As for asset quality, the NBFC-IFCs witnessed a deterioration during FY2016-FY2018 on the back of severe stress in the thermal power sector.
However, the trend over past three years suggested receding asset quality pressures, particularly up to onset of Covid-induced disruption. The gross stage 3 percentage had eased to 5.7% as on 31 March 2020 from 7.3% as on 31 March 2018, supported by controlled fresh slippages and some resolution in legacy stressed assets.
The gross stage 3 percentage for NBFC-IFCs eased further to four-year low of 5.0% as on 30 September 2020, partly aided by limited forward bucket movement amid the prolonged moratorium period.
Further, while more clarity on the impact of Covid-induced disruption on asset quality trajectory will emerge over coming quarters, most infrastructure sub-sectors remained relatively resilient from debt servicing perspective in lockdown conditions supported by factors such as must-run status of renewable energy projects, healthy recovery in toll collections, liquidity support to discoms etc.
ICRA notes that most freight indicators have reverted to pre-Covid levels as economy revived, road traffic and toll collections have register marked growth for three consecutive months on Y-o-Y basis, electricity and fuel consumption is reverting to Y-o-Y growth trend, and construction activity has picked up in recent months. Hence, the incremental stress in infrastructure sector due to Covid-induced disruption is expected to be limited, and the proportion of portfolio of IFCs likely to be restructured is expected to be in low single digits. Nonetheless, any stress build-up in the near to medium term from spill overs due to the region-specific headwinds faced by the renewable energy sector remains a monitorable.
Deep Inder Singh, Assistant Vice President – Financial Sector Ratings, ICRA, said, “Steady provision build-up also augurs well for risk profiles of IFCs, especially when pace of stressed asset resolutions has got constrained by Covid-induced disruption and is expected to get elongated. The provision cover against stage 3 assets stands increased at 59% as on 30 September 2020 compared to 53% as on 31 March 2020 and 52% as on 31 March 2019.”
The leverage has stabilized for IFCs with gearing of about 7.5x and 5.2x for public-IFCs and private-IFCs, respectively, as on 30 September 2020, given the relative moderation in the portfolio growth of IFCs during past eighteen months. Further, with increased prudence and focus on liquidity, share of commercial paper borrowings of IFCs has dipped over past 18 months. This coupled with an increase in share of longer tenor borrowings amid the favorable interest rate trajectory is expected to augur well for asset liability maturity (ALM) profiles of IFCs, though ICRA expects the ALMs to continue to remain characterized by sizeable cumulative negative mismatches in the up to one-year buckets given the inherently long tenure of assets compared to average tenure of borrowings.
In H1FY2021, given steady decline in non-performing loans as proportion of total portfolio (though still elevated) and the favorable lending spread trajectory, public-IFCs, on an aggregate basis, achieved RoA of 1.8% compared to 1.5% in FY2020 and six-year average of 1.7%. Also, the reported RoE metric for public-IFCs stood strong at 17.2% in H1FY2021 after having dipped to 10-11% in FY2017 and FY2018 and 14%-15% in FY2019 and FY2020.
However, given the intense competition from public-IFCs, infrastructure debt funds(IDF) and banks, profitability of private-IFCs (excluding IDFs) remains lower as reflected by RoA of 1.1% in H1FY2021 compared to 1.8% each reported by public-IFCs and IDFs.
“The cost of funds for IFCs during last few years was impacted by the risk aversion towards NBFCs, especially those with wholesale assets. Nevertheless, incremental borrowings by IFCs have started to reflect the impact of lower systemic rates and thus decline in cost of funds is expected to become more pronounced in near term. Besides, the movement in yields on loans and credit cost/recoveries from stressed assets will remain critical determinants of profitability trajectory of IFCs, going forward,” Saggar concluded.
The Central Government has set a target of infrastructure investment of over Rs.111 lakh crore under the national infrastructure pipeline (NIP) over FY2020-FY2025. While this was already being seeing as ambitious prior to the pandemic, the Covid-19 induced disruption has further increased the challenges. State governments are staring at a huge revenue deficit in current financial year; therefore, the headroom available to them for incurring capital expenditure has reduced substantially, especially for the near term.
Nevertheless, most of the growth (2/3rd) achieved in FY2019 and FY2020 was also back-ended; hence, a pickup in H2 FY2021 cannot be ruled out, though the pressure on the fiscal position may limit the Government’s push and may constrain a major reversal in trend. Over the medium to longer term, however, the growth for NBFC-IFCs is expected to revert to healthier levels given the governments focus towards infrastructure development, though largely supported public-IFCs; and IDFs, which however remain relatively small though continue to gain scale.
While the Central Road and Infrastructure Fund (CRIF), the National Investment and Infrastructure Fund (NIIF), and the Infrastructure Investment Trust (InvITs) would aid bridging the infrastructure financing deficit, public-IFCs are expected to remain the critical participants in the current or possibly evolved avatars, said ICRA. #infrastructure #projects #tenders #banking #financing /fiinews.com
