The increase in the restructured book has been on expected lines, says Karthik
Assuming no adverse disruptions on account of a new wave of coronavirus infections, the return on average managed assets (RoMA) of Retail-Non Banking Financial Companies (Retail-NBFCs) is to improve in the current fiscal and reach pre-Covid levels of 2.6-2.7% in FY2023 as credit costs are expected to reduce from the peak witnessed in FY2021, according to A M Karthik, Vice President, Financial Sector Ratings, ICRA Limited, an Indian independent and professional investment information and credit rating agency.
ICRA expects the credit costs in FY2022 to be lower than last year’s level in the base case. The performance of the restructured book, however, would be key, as anecdotal evidence suggests that the collections in this book remain weaker.
The operating expenses are expected to increase in line with the growth in business and as the entities tighten their internal processes in view of the various regulatory changes. Further, competition from banks and the likely increase in the borrowing rates could impact margin. Entities are carrying surplus liquidity on their balance-sheet at present, some unwinding of the same, as the operating uncertainties because of the pandemic eases, could provide support to the margins.
The increase in credit costs was the key reason for the dip in the earnings performance of NBFCs in Q1 FY2022. As overdues moderated in Q2, provisions were also written-back, which led to a fall in the credit costs vis-à-vis the previous quarter; the write-offs in Q1 and Q2 (annualised) were largely stable and similar to the FY2021 level.
“The increase in the restructured book has been on expected lines as it doubled over the March 2021 level and stood at 4.5% of the Assets Under Management (AUM). Of the total outstanding restructured book of Retail-NBFCs, about 70% was done in H1 FY2022,” said Karthik.
As restructuring in the current fiscal was largely done in Q2 FY2022, generally with a moratorium of 3-6 months and, as the commencement of repayments from these accounts, in Q3/Q4 FY2022, coincides with the new wave of infections, any significant disruption would impact the asset quality of the sector, he added.
AUM of the Retail-NBFC (excluding housing finance companies) grew by less than 1% in H1FY2022. After shrinking by about 2.0% during Q1 FY2022, Retail-NBFC AUM rebounded from the low base of June 2021 and grew sequentially by about 2.8% in Q2 FY2022.
In view of the muted H1 performance, ICRA has revised the AUM growth outlook for the current fiscal to 5-7% from 8-10%. Growth outlook would be exposed to downside risk in case of significant disruptions caused by the new wave of infections in Q4 FY2022. At present, while the infections rates remain high, the operational disruptions have been quite limited.
Measures taken by the regulator to strengthen the structural, regulatory and supervisory framework for the sector, especially the tighter non-performing advances (NPA) recognition/upgradation norms, could lead to increased focus on internal controls, which can, in turn also impact sectoral growth.
“Apart from the various regulatory changes over the last 3-4 months (other key regulations include scale-based regulations, prompt corrective action framework for NBFCs etc) and a muted H1FY2022, we note that some of the key segments of Retail-NBFCs, especially vehicle finance, are faced with supply-side constraints, which could pull-down growth vis a vis our expectation, even if the demand remains less impacted by the new wave of infections. AUM growth is expected to revive to 8-10% in FY2023,” said Karthik.
Stage-3 assets moderated in Q2 FY2022 from the peak in Q1; it had increased significantly by about 180 bps in Q1 FY2022, the sharpest in the recent past. As of September 2021, the stage 3 stood at 5.8% was still about 120 bps over the March 2021 level. ICRA expects it to settle at about 5.3-5.8% (net of write-offs) by the end of this fiscal. The overall write-offs in Q1 and Q2 FY2022 remained high at 2.4% (annualised) of the AUM, similar to FY2021. Provisions remained high, notwithstanding some moderation in Q2FY2022, thereby providing buffer for incremental risks/uncertainties; provisions as of September 2021 were about 1.7x of the December 2019 level.
In view of the tightened NPA recognition and upgradation norms notified by the Reserve Bank of India (RBI), the gross stage 3 (GS3) reporting vis-à-vis NPA reporting to the RBI could see increased divergence; it is believed that the same would not affect the risk profile of NBFCs in the near term. Provisions under IndAS are generally higher than the income recognition, asset classification (IRAC) norms and were further augmented because of the pandemic. Thus, no significant incremental impact is envisaged on the near-term profitability or capitalisation profile. However, pressure would be felt over the medium term if the forward flow from the stage 2/special mention account (SMA) category is not contained. fiinews.com
