For FY22, India Ratings and Ratings (Ind-Ra) has maintained a stable outlook on retail non-banking finance company (NBFC) and housing finance company sectors. It highlighted that improved system liquidity and strong capital buffers have resulted in growth in loan disbursements.
However, the rating agency continues to maintain a negative outlook on the wholesale NBFC sector for FY22. Its negative outlook is on NBFCs offering commercial vehicle loans, loans against property and small microfinance institutions. The agency has a stable outlook on housing financiers, tractors and gold financers for the next financial year.
Ind-Ra expects operating costs to normalize to pre-COVID levels for NBFCs. This will lead to a moderation in pre-provision buffers to absorb higher-than-envisaged credit loss. The rating agency expects non-bank lenders to grow by 9.5% year-on-year in fiscal year 2022.
It forecasts growth for housing finance companies to be around 10% year-on-year, higher than the expectations of 4% – 5% and 6.5%, respectively, for fiscal year 2021. Moreover, the agency expects asset quality to remain elevated. It said any recovery would hinge on economic gaining momentum in fiscal year 2022. It also expects lower softer delinquencies and moderate addition to gross non-performing assets.
Ind-Ra expects 1.5%-3% of the book getting restructured and 100-150bps addition to existing GNPA, leading to an overall stressed book of 9.5%-11% for these NBFCs. It says credit loss would normalize for non-banks for FY22 due to the higher COVID-19 provision taken in fiscal year 2021.
The Reserve Bank of India has been progressively aligning the regulations for non-banks with banks. The rating agency said that while NPL recognition norms were aligned earlier, now non-banks have to implement liquidity coverage ratios. Regulator discussion paper proposes to bring about scale-based regulations which will further close the regulatory gaps between banks and non-banks. This would potentially increase regulatory compliance costs while also reducing the spill-over risk. Additionally, some of proposed restrictions, if implemented, may require readjustment in the business strategy.
Few large multi-product NBFCs could explore migration onto the banking platform, though one of the immediate concerns could be fulfilling cash reserve ratio/statuary liquidity ratio requirements from day one in the absence of any regulatory dispensation.
The rating agency believes that competition from banks is likely to intensify especially for secured asset class such as mortgage and loan against property. Few large non-banks thus would increasingly focus on customer retention by building strong ecosystems of diverse product suites to address customer needs.