“Considering this sluggish disbursements and portfolio degradation in the absence of any moratorium as in Q1 FY2021, the (AUM) for the NBFC-segment shrank in Q1 FY2022, while the HFC AUM remained flat,” the agency said.
However, as disbursements to the sector improved sharply in July 2021 due to sluggish demand, the stability of the same would depend on broader macro-economic indicators.
According to Manushree Sagar, the agency’s vice president and sector head (financial sector ratings), the second wave has temporarily pushed back the revival for the sector.
Icra expects total disbursements for FY22 to be higher by around 6-8 per cent on a year-on-year basis, on the back of two consecutive years of year-on-year contraction, she said.
“From AUM perspective, the sector is expected to grow at 8-10 per cent in FY2022. Growth will be driven by an improvement in demand for all key target segments, which will be on a lower basis than FY21 ” Said Sagar.
The agency said the asset quality for non-bank entities weakened significantly in Q1 FY2022 due to the second wave of COVID-19 infections by various states leading to localized lockdown, which affected the collection process of these entities, the agency said.
Headline asset quality numbers are expected to remain moderate, as the trend in collection efficiency (CE) continues to be encouraging.
The agency expects a 50-100 basis point (bps) increase (net of recovery and write-off) in overdues in FY22, assuming there are no further COVID-19 induced lockdowns.
“While asset quality pressures persist, the increase in overall provisions, which currently stands at 1.7x pre-COVID levels (December-19), provides some relaxation. Sufficient relaxation will be available for off and cleaning their balance sheet,” said Sagar.
NS NBFC He added that sector write-offs remained high in Q1 FY2022.
Given the uncertainties in the operating environment, write-offs in FY22 are likely to remain high – similar to the previous fiscal (around 2.4 per cent of AUM for NBFCs and 0.3 per cent for HFCs), he said.
The agency said NBFC credit costs rose sharply in Q1 FY2022 as write-offs remained elevated and provisions increased.
While the NPAs/Stage 3 of HFCs also increased during this period, the credit cost declined as compared to Q4 FY2021 as provisions did not grow as fast as NBFCs and write-offs were negligible.
As a result, net profit during the quarter fell to the lowest level in recent days.
Sagar said that assuming there is no further lockdown, the earnings performance of NBFCs is expected to improve in the subsequent quarters, as credit costs will come down with reduction in overdues from June 2021 levels.