Outlook for NBFC-HFC sector remains ‘negative’, says ICRA

The outlook for the non-bank sector – non-banking finance company (NBFC) and housing finance company (HFCs) – remains ‘negative’ as the operating environment is yet to materially recover post the pandemic-induced disruptions, according to ICRA.

Further, the near-term demand outlook is likely to continue to remain subdued, the credit rating agency added.

ICRA expects the NBFC Assets Under Management (AUM) to contract by 2 to 4 per cent in FY21 as the wholesale exposures – corporate/ real estate – are steadily being run down, while retail-NBFC AUM is expected to grow at +/- 1.5 per cent.

HFCs, on the other hand, are expected to grow their AUMs at about 5-8 per cent in FY21. Overall, non-bank (NBFCs, excluding infra NBFCs; and HFCs) growth is expected to revive in the next fiscal, on the back of lower base and expected uptrend in demand, the agency said.


AM Karthik, Vice-President and Sector-Head Financial Sector Ratings, ICRA, said: “The performance of non-banks needs to be observed closely, given its close economic linkages.

“With the pandemic-affected operating environment yet to recover fully, lenders may face increased delinquency levels, although currently the same is lower than the previous ICRA estimates.”


The provision build-up and improved capital profile over the recent past, however, would provide risk cushion to an extent.

Growth to remain stunted

Karthik cautioned that players would face increased competitive pressures, going forward, and most of them may turn cautious. As a result the near-term growth would continue to remain stunted.

ICRA assessed that AUM growth could revive to about 13-15 per cent in FY22, considering the lower base in FY21 and the likely demand revival. Profitability, however, over the next 1-1.5 years, is likely to remain under pressure and lower than the levels witnessed pre-covid.


Non-banks have witnessed a good improvement in the collection efficiencies (CE) since September 2020 after post Covid-19 disruptions in Q1 (April-June).

ICRA underscored that the sector’s credit profile is supported by a steady improvement in credit provisions over the last few quarters, and moderately reduced its NPA (non-performing asset)/Gross Stage3 (GS3) assets in the quarter ended September 2020.

Asset quality indicators are supported by limited forward flow into harder delinquency buckets (90-plus days past due) because of the prolonged moratorium coupled with some collections from overdue accounts.

Karthik said: “Currently, non-banks are having 50 per cent higher provisions, at about 3.1 per cent of their AUM compared to about 2 per cent a year ago (September 2019). Higher provisions will allow them to absorb near-term uncertainties to some extent.”

As for Collection Efficiencies (EFs), Karthik observed that most entities have reported CE between 85-95 per cent levels in September 2020 (NBFCs CE was about 70 per cent in August and about 65 per cent in July while HFCs’ CE was about 81 per cent in August and about 78 per cent in July).

Loan moratorium

He said the improvement in CE is partly due to the closure of loan moratorium to borrowers because of the Covid-19 disruptions, and given the fact that collections are typically higher in the last month of the quarter than during other months.

As per ICRA’s note, initial feedback indicates that CE trends in October 2020 is similar to or marginally better than September 2020 levels. Most players indicated loan restructuring at around 5-6 per cent, below the ratings agency estimates of 5-10 per cent.

While lower-than-expected restructuring indicate the lower stress expectation of the players, ICRA notes that the CEs are about 5-15 per cent lower than pre-Covid levels, and this has resulted in a corresponding increase of up to about 15 per cent in the softer bucket delinquencies in September 2020.

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