Led by retail-focused players, non-banking financial companies (NBFCs) are likely to close the current fiscal and the next with loan growth of 10-12 per cent and see around 50 basis points improvement in profitability, a report said.
According to ICRA Ratings, retail-focused NBFCs are expected to grow 12-14 per cent while the housing finance companies may grow by 10-12 per cent. The forecast is based on the asset quality improvement and the overall pick-up in credit demand.
However, microfinance and personal loans, which together constitute a quarter of the Rs 25-lakh crore shadow banking sector, will continue to grow at a high pace.
Sectoral profitability will improve by 40-50 basis points (bps) this fiscal, supported by stable margins and lower credit cost, and will reach the pre-pandemic levels, the report said.
While growth will be broad-based across various sub-sectors, microfinance and personal loans will be leading the growth chart. On the other hand, vehicle financing loans (commercial vehicle finance, passenger vehicle finance), which have remained significantly subdued since FY20, are also expected to report higher growth numbers, following an improvement in the operating environment.
Manushree Saggar, a vice president and sector head – of financial sector ratings at the agency, said, disbursements of NBFCs (excluding infra-NBFCs) and HFCs (Housing Finance Companies) have been higher than the pre-pandemic levels for three consecutive quarters, indicating that the industry has finally come out of the long trough.
Accordingly, the growth outlook for NBFC-HFCs is 10-12 per cent for FY23. Within this, NBFC-retail is expected to grow at 12-14 per cent, while HFCs may grow at 10-12 per cent, she said, adding, for FY24, the growth estimate is pegged at 10-12 per cent, given the uncertain global macroeconomic conditions which may pose some downside risks towards the end of FY23 or early FY24.
According to the report, the asset quality of non-banks has been improving steadily since December 2021 as borrowers gradually recovered from the pandemic-induced stress. The improvement has been on the back of higher collections, a lower-than-anticipated share of restructured portfolio estimated at 2 per cent of total assets under management as of September 2022 and controlled slippages from this book and reported ratios also benefiting from the base effect of high growth.
Overall, the majority of stress from the restructured book is likely to be absorbed in FY23 and slippages are expected to remain range-bound. The agency, therefore, expects the NBFCs to report some moderation in reported asset quality indicators and credit costs by March 2023.
On the profitability front, while rising interest rates are expected to bring net interest margins pressure, the impact has been somewhat offset as banks have not passed on the entire cost increase and NBFCs have been able to pass on the limited rate hikes to their borrowers.
Stable margins along with moderation in credit cost will support the improvement in profitability indicators for NBFCs and the agency expects them to report a return on managed assets of 2.6-2.9 per cent in FY23, R Srinivasan, a vice-president and sector head—financial sector ratings at the agency, said.