After a moderation in growth during FY21, non-bank financial corporations (NBFCs) are expected to see a 9.5% increase in their assets under management during FY22, according to a report released Thursday.
Housing finance companies (HFCs) will show higher growth at 10% as home sales rise, said India Ratings and Research, keeping its outlook on NBFCs and HFCs ‘stable’ for fiscal 22 .
He estimated that growth would slow to 4-5% for NBFCs and 6.5% for HFCs in FY21, mainly due to the impact of the coronavirus pandemic.
The liquidity of the system has improved dramatically as the majority of large non-bank institutions have strengthened their capital reserves and the sector has started to experience growth in disbursements, the rating agency said.
The large differential between NBFC financing costs is likely to push the sector to consolidate, especially in sectors with a slim margin profile and limited product differentiation, he said, adding that the strong support regulatory regime during fiscal year 21 ensured adequate liquidity.
From an asset quality perspective, wholesale NBFCs will face challenges in FY22, the agency said and maintained the negative outlook on these entities.
The stress from the pandemic has moderated due to government programs that have resulted in a drop in defaults and a moderate addition to gross non-performing assets (GNPA), he said, noting that all Stressed workers will be higher than a recent RBI estimate of 8 percent.
System-level stressed assets for NBFCs stood at 8% on September 30, 2020 according to the RBI report, and between 1.5 and 3% of the book would be restructured and an addition of up to 1.5% will occur . the GNPA, bringing the overall stressed book to between 9.5 and 11%, he estimated.
Many large NBFCs raised capital before COVID-19 and during the pandemic, which helped bolster capital cushions to absorb the above stress while carrying COVID-related provisions. The cost of credit will normalize for non-banks in FY 22, as the provision was taken into account in FY 21 itself.
Competition from banks is likely to intensify, especially for secured asset classes such as mortgages and home loans, according to the report. Few large non-bank companies would focus more and more on customer retention by creating strong ecosystems of various product suites to meet customer needs.
NBFCs will focus on segments where they have inherent strengths such as used vehicle finance, two-wheelers, tractors, unsecured loans, gold, and affordable housing, as their pricing power. Price is high and these products face limited competition from banks, he said.
Regarding the RBI’s regulatory alignment measures, the rating agency noted that a discussion paper proposes to put in place scale-based regulations that will further close the regulatory gaps between banks and non-banks. banks, at least for a few large ones. In such event, if implemented, it will increase the cost of compliance and lead to readjustment of business strategies.
“Few large multi-product NBFCs could explore the migration to the banking platform, although one of the immediate concerns may be to meet the cash reserve ratio / statutory liquidity ratio requirements from day one in l. ‘absence of any regulatory derogations,’ he said.
Going forward, NBFCs will also seek to take advantage of co-lending opportunities presented by regulation and attempt to earn revenue from the fees of the stream, he added.
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