AUM growth of NBFCs to remain under pressure in FY21: Icra

Although non-banking financial companies (NBFCs) have witnessed an improvement in collections, rating agency Icra expects assets under management (AUM) of the non-bank lenders to remain under pressure in FY21. The rating firm said that AUM of NBFCs will contract by 2-4% in FY21. However, housing finance companies (HFCs) are expected to grow their AUMs at about 5-8% in the current financial year. Icra has maintained sector’s outlook ‘negative’ as the operating environment is yet to materially recover, post Covid-19 disruptions. The near-term demand outlook is likely to continue to remain subdued.

A M Karthik, vice president and sector-head financial sector ratings, Icra said that AUM growth could revive to about 13-15% in FY2022, considering the lower base in FY21 and the likely demand revival. Profitability, however, over the next 1-1.5 years, is likely to remain under pressure and lower than the levels witnessed pre-Covid, he added. Karthik also said that the performance of non-banks needs to be observed closely, given its close economic linkages. “With the pandemic affected operating environment yet to recover fully, lenders may face increased delinquency levels, although currently the same is lower than the previous Icra estimates,” he added.

Non-performing assets could see an increase of about 130-200 basis points (bps) as per Icra, compared to projection of 300 bps earlier. The rating firm said that entities, especially those having retail exposures, would prefer to write-off sticky overdues. This will be done considering the provision build-up, adequate earning performance and their comfortable capital structures. Currently, non-banks have made a 50% higher provisions, at about 3.1% of their AUM. This is more than provisions of about 2% AUM, a year ago. The higher provisions will allow NBFCs to absorb near-term uncertainties to some extent.

As per Icra’s note, moratorium has benefitted the borrowers. Initial feedback indicates that collection efficiency trends in October 2020 is similar, or marginally better than September 2020 levels. Most players indicated loan restructuring remained at around 5-6% of the total advances. While lower-than-expected restructuring indicate the lower stress expectation of the players, Icra noted that the collection efficiencies were about 5-15% lower than pre-Covid levels.