NBFCs' Best NPA Numbers Possibly Behind Us As Delinquencies May Rise, Says ICRA
This has come as the NBFC sector has grown at a fairly robust pace, ICRA said.
As tight regulatory actions, moderation in credit growth, and impact on margins may dampen the outlook for non-banking finance companies this financial year, ICRA Ltd. believes that the best non-performing assets days for this sector are behind as delinquencies are expected to rise.
"Clearly, in the lending business, the moment you start slowing down, you see a rise in delinquencies because portfolio seasoning also occurs. We've already seen some signs of slippages increasing and delinquencies going up in April-June," said AM Karthik, senior vice president and co-group head of financial sector ratings at ICRA.
"Clearly, the best days of NPA numbers are possibly behind us in the near term. We will definitely see some rise in delinquencies," he said.
This has come as the NBFC sector has grown at a fairly robust pace.
Slower growth and seasoning in the portfolio, followed by the steep credit expansion in the retail asset segments in the last two financial years, would now start showing in the sector's asset quality performance this year, the rating agency said in a press release.
Additionally, concerns about overleveraging and an increased share of unsecured loans exist, and this credit risk is likely to pose an elevated loan quality risk for the sector, it said.
In March, unsecured loans, including personal and business purposes, accounted for 11% of the overall NBFC assets under management, up from 7% in March 2021.
The overall retail asset loan quality of NBFCs, excluding housing finance companies, is expected to weaken by 30–50 basis points in the current financial year, according to ICRA.
Elevated costs of funds, increased competitive pressures from banks, slowing growth, and asset quality challenges are likely to impact the sector's profitability. ICRA expects the sector's margins to decline by 25–45 bps in the current financial year as compared to a year ago.
The rating agency states that higher funding costs will put pressure on margins for housing finance companies and infrastructure finance companies, but the impact may be less severe than for their peers in the sector.
Overall, Karthik said that NBFCs are fairly comfortable as long as there are no major macro-level shocks, which ICRA is not expecting at this point in time.
While slight turbulence is expected, he believes that the sector should be able to manage it without any material impact and must remain afloat in the next 10–12 months.
