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) to grow by about 7-9 per cent vis-a-vis about 4 per cent growth (provisional) for FY2021. As per an ICRA note, the second-wave of pandemic is expected to result in a disbursement contraction of about 50-60 per cent in Q1FY2022 vis-a-vis Q4FY2021.

However, the ratings agency expects the disbursements to revive healthily in the latter part of the year and register a 6-8 per cent Y-o-Y growth vis a vis the 11-12 per cent 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.

“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 per cent 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 per cent of the sectoral credit, were amongst the severely affected states by the second wave and witnessed tighter restrictions.”

A M Karthik
Vice President, Financial Sector Ratings
ICRA Limited
  • Disbursements are likely to witness a 50-60 per cent decline, on a sequential basis, in Q1FY2022. It however is expected to revive healthily in the latter part of the year and register a 6-8 per cent Y-o-Y growth
  • Sectoral AUM growth is pegged at 7-9 per cent for FY2022 vis a vis about 4 per cent in FY2021; Low base and growth in disbursement to support AUM growth.
  • Pressure on asset quality to manifest as a 50-100bps increase in NPAs; write-offs likely to remain higher and similar to the last fiscal in the base case scenario
  • Demand for restructuring would go up in the current fiscal because of the prolonged stress in the operating environment and non-availability of any blanket forbearance like loan moratorium etc; restructuring in the last fiscal was about 1.5 per cent of the sectoral AUM

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 per cent 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 per cent for FY2021 vis a vis about 3.1 per cent 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 remain 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. 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.

Suggested Read: Rise in consumption of petrol and diesel in FY2022 can absorb cut in cesses by Rs. 4.5/litre, without revenue loss to GoI relative to FY2021: ICRA (indiaunicorn.com)

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