Most infrastructure sub-sectors remained resilient from debt servicing
Given the Covid-induced disruption, trajectory of total infrastructure credit (banks and NBFC-IFCs) slowed further in 9M FY2021, following the moderation in growth seen in FY2020, according to ICRA Ltd.
Overall, while infrastructure credit grew 7% in FY2020 to Rs.22.5 lakh crore as on 31 March 2020, it increased marginally to Rs.22.9 lakh crore as on 31 December 2020, says ICRA report on 19 April 2021.
The aggregate NBFC-IFC credit book stood at Rs.12.3 lakh crore as on 31 December 2020, with Public-IFC category accounting for a majority share (94%) with an aggregate loan book of Rs.11.6 lakh crore as on 31 December 2020. This is followed by a 4% share of Private-IFCs with an aggregate loan book of Rs.0.46 lakh crore and a 2.4% share of IDFs.
Growth in the loan book of IFCs in 9M FY2021 was led by a 7% growth in the disbursements of Public-IFCs (ex. IRFC). ICRA estimates that IFCs (ex. IRFC) disbursed loans aggregating to Rs.1.35 lakh crore in 9M FY2021, with the growth component driven by disbursements related to the liquidity package for discoms.
“Tepidness in 9M FY2021 was primarily due to the sequential degrowth (6%) in banking sector credit to the infrastructure segment, though IFCs continued to grow at a modest sequential pace of 11% led by disbursements related to the liquidity package for cash-strapped distribution companies (discoms) with PFC and REC as lending partners,” said Manushree Saggar, Vice President and Head – Financial Sector Ratings, ICRA,
“The asset quality trajectory over the past three years suggests receding asset quality pressures for NBFC-IFCs. Led by a few stressed assets resolutions/recoveries, sizeable write-offs, curtailed incremental slippages, and the optical impact of a growing asset base, the Stage 3 percentage has eased to 4.5% (6.0% – ex IRFC) as on 31 December 2020 from peak level of 7.3% (9.0% – ex. IRFC) as on 31 March 2018.
“However, the aggregate Stage 2 percentage has remained volatile and at an elevated level at the end- FY2021. Further volatility and stress cannot be ruled out.”
ICRA notes that most infrastructure sub-sectors remained resilient from a debt servicing perspective during lockdown conditions due to factors such as:
a) availability of liquidity buffers in the form of a DSRA and/or co-obligor structures;
b) must-run status of renewable energy projects;
c) liquidity package to cash-strapped discoms;
d) ARPU up-trading in the telecom sector; and
e) two-part tariff structure for thermal plants with availability-linked recovery of fixed charges.
Hence, the stress in infrastructure sector due to Covid-induced disruption has been limited, and this is also reflected in the relatively low proportion of Covid related restructuring across portfolios of NBFC-IFCs.
“Balance sheets of NBFC-IFCs recuperate as asset quality and solvency indicators have improved to five-year low level with further improvement likely as resolutions gain pace. Resolution of top few accounts of each entity could lead to further significant improvement,” said Deep Inder Singh, Assistant Vice President – Financial Sector Ratings, ICRA.
Given the relative moderation in the portfolio growth of IFCs during the past two years and equity capital raised by few entities, the leverage has moderated slightly with a gearing of about 7.3x and 5.2x for Public-IFCs and Private-IFCs, respectively, as on 31 December 2020.
Nonetheless, with a pickup in disbursements and sizeable dividend outgo for some of the entities in Q4, there could be some uptick in the leverage from hereon. Going forward, 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 as ICRA believes that prudent capitalisation is a key mitigant against the risks in the IFCs’ portfolio arising out of sectoral and credit concentration.
As for liquidity, the Asset Liability maturity (ALM) profile for NBFC-IFCs stands improved as reliance on short term borrowings has reduced and longer tenor borrowings have been raised in recent past amid favorable systemic rates. Also, declining trajectory of the cost of funds is expected to become more pronounced in coming quarters.
Operating profitability of Private-IFCs has remained largely in a similar range as Public-IFCs, albeit benefiting from a lower leverage. However, given the higher leverage multiplier for Public-IFCs, the profitability of Private-IFCs remains low with a sub-par RoE of 8.2% in 9M FY2021 and a five-year average RoE of 8.6%.
Given the favourable borrowing cost trajectory and steady decline in NPAs, Public-IFCs, on an aggregate basis, achieved an RoA of 1.9% in 9M FY2021 compared to 1.5% in FY2020 and the six-year average of 1.7%. Furthermore, as the leverage multiplier has increased over the past five years, the reported RoE metric for 9M FY2021 stood strong at 17.8% after having dipped to 10-11% in FY2017/FY2018.
“Growth in the infrastructure credit in FY2021 is likely to remain considerably lower than previous years. However, medium term growth prospects are strong as demand is expected to gather pace amid government’s resolve to focus on the Infrastructure sector to revive economic growth,” said Saggar.
“The expected pick-up in demand is likely to coincide with a recovery in balance sheet strength of NBFC-IFCs and their improved ability to raise relatively longer-term funding at competitive rates amid the favorable systemic rates trajectory,” said Saggar. #banking #investment #loans /fiinews.com
