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India Ratings and Ratings (Ind-Ra) has maintained a stable outlook on retail non-banking finance company (NBFC) and housing finance company sectors for FY22.

The system liquidity has improved considerably, while majority of large non-banks have strengthened their capital buffers and the sector has started witnessing disbursement growth.

The agency continues to maintain a negative outlook on the wholesale NBFC sector for FY22, factoring in significant asset quality challenges and added regulatory restrictions on different products lines and increased competition from banks.

The wide differential among NBFCs’ funding costs is likely to push the sector to consolidate, especially in the sectors with a thin margin profile and limited product differentiation. FY21 saw a strong regulatory support through the infusion of liquidity, which aided the liquidity risk converting into a solvency risk.

However, NBFCs need to plan for managing liquidity as and when these measures are rolled back. Ind-Ra believes that securitisation and co-lending model would get further traction as the funding requirement of the sector overshoots the saving mobilisation rate.

Non-banks have seen a moderation of funding cost by 80-120bp for higher rated issuers, leading to relief in providing covid-related provision, along with some savings in operating costs.

However, Ind-Ra believes funding cost in FY22 would be a function of system liquidity; operating cost would normalise to pre-COVID levels, thereby leading to a moderation in pre-provision buffers to absorb higher-than-envisaged credit loss.

NBFcs to grow by 9.5%

Ind-Ra expects NBFCs to grow by 9.5% yoy in FY22, whereas growth for housing finance companies would be around 10% yoy, higher than the expectations of 4%-5% and 6.5%, respectively, for FY21.

The Reserve Bank of India has been progressively aligning the regulations for non-banks with banks. While NPL recognition norms were aligned earlier, now non-banks have to implement liquidity coverage ratios. The regulator discussion paper proposes to bring about scale-based regulations which will further close the regulatory gaps between banks and non-banks, at least for a few large ones.

This would potentially increase regulatory compliance costs while also reducing the spill-over risk, Ind-Ra said.

Additionally, some of proposed restrictions, if implemented, may require readjustments 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.

Ind-Ra believes that the 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.

Ind-Ra estimates stress due to the pandemic has moderated due to government schemes which have led to lower softer delinquencies and moderate addition to GNPAs.

The overall assets under management benefitting from these schemes stand to show wider divergence across non-banks from 2% to 15% of overall advances; however on an overall basis, this stands around 4% of the advances for selected large issuers.

The system-level stressed assets for NBFCs stood at 8% on  September 30, 2020, where Ind-Ra believes there could be 1.5%-3% book getting restructured and 100-150bp addition to existing GNPA (September 2020: 6.6%), leading to an overall stressed book (GNPA + restructured) of 9.5%-11% at the system level for these NBFCs.

Many large NBFCs raised capital before COVID-19 and during the pandemic, resulting in strengthened capital buffers to absorb the above stress along with carrying COVID related provision.

Credit cost would normalise for non-banks for FY22 in lieu of the higher COVID provision taken in FY21, along with moratorium on certain portion of book, driving the provision requirement lower. However, asset quality would remain elevated, any recovery would hinge on economic gaining momentum in FY22.

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