Non-bank financial corporations (NBFCs) have shown resilience in 2021 despite the woes of the coronavirus pandemic and are expected to experience continued growth momentum this year.
This year, growth will be driven by the recovery of the economy, a stronger balance sheet, higher provisions and improving the capital position of NBFCs.
On the flip side, NBFC’s gross non-performing assets (APNs) are expected to rise, following the Reserve Bank of India (RBI) decision to toughen APN standards in November 2021.
“Our basic assumption is that the worst is behind them (the NBFCs) and that things will start to improve here. We expect the NBFCs to show higher growth and they will benefit from the upturn in the market. economy, “said Crisil Ratings Ltd, Senior Director and Deputy Director of Ratings. Krishnan Sitaraman said.
Shadow banking players’ assets under management (AUM) are expected to grow 6-8% in the current fiscal year and 8-10% in the next fiscal year, Sitaraman said.
Recently, the India Banking Trends and Progress 2020-21 report released by the RBI said, “With the accelerating pace of vaccinations and the growing economic recovery, the NBFC industry is expected to remain vibrant. “
ICRA Ltd Vice President and Sector Head AM Karthik said the NBFC sector, including housing finance companies (HFCs), but excluding sub-focused and government-owned entities government, has experienced a roller coaster trend over the past 12 to 18 months.
The rebound in the second half of fiscal 2021 thanks to pent-up demand and after the easing of the COVID-19 lockdown has supported earnings growth and performance, he said.
Karthik also said this fragile recovery was hampered by the second wave of the pandemic in the first quarter of fiscal 2022.
The impact was relatively limited compared to the previous fiscal year, with the sector rebounding in the second quarter of fiscal 2022 in terms of disbursements and growth in assets under management, he added.
Ashwini Kumar Hooda, deputy managing director of mortgage financier Indiabulls Housing Finance, said: “I think 2022 will be a very good year. last year.”
With lower interest rates, rising incomes, and stable home prices, there will be demand for home and home loans.
“Thus, the growth of home loans will be at least 15 to 20% during the year 2022,” he said.
In the current cycle, all home sales are driven by end-user demand and there are no investors in the market, he added.
To strengthen the supervision of NBFCs, the Reserve Bank of India (RBI) introduced scale-based regulation and revised the standards for recognition and upgrading of the NPA in 2021.
The revised standards included classifying the Special Mention Account (SMA) and NPA based on end-of-day position and upgrading an NPA to a standard category only after clearing all delinquencies.
CARE Ratings Senior Director Sanjay Agarwal said that with the new RBI asset classification standards, NBFC’s NPAs are likely to be high from FY21 levels.
In a report released in November 2021, CARE Ratings said there would be an increase of up to 300 basis points (bps) in gross NPAs with limited impact for shorter-term loans due to revised NPA standards. .
The average increase is expected to be around 150 basis points (bps) in gross NPAs, a proportion of assets moving from SMA2 compartments, according to the report.
Sitaraman expects reported NPAs for NBFCs to increase between 25 and 300 basis points, depending on the segment in which they operate.
While for home loans and gold loans, the NPAs will be in the lower end of the range; and for MSMEs or NBFCs of unsecured loans, it will be at the high end of the range, he said.
“However, this will not impact the fundamental quality of the assets as it is more of an accounting measure,” Sitaraman said.
According to the Financial Stability Report (FSR) released by the RBI in December, NBFC’s gross NPA ratio, which had declined in September 2020 reflecting the end of asset classification at the time, increased to 6. 5% at the end of September. 2021.
In December, the RBI introduced the Rapid Corrective Action Scheme (PCA), which aimed to strengthen market discipline among non-bank players and align their regulations with those of banks.
The standards introduced a risk threshold control for NBFCs based on total capital, level 1 capital and net NPAs. The framework will take effect on October 1, 2022, based on the financial position of NBFCs on or after March 31, 2022.
The PCA framework, which prescribes a certain level of NPA number, means that NBFCs will focus more on collection and will not allow an account to fall into the NPA category, said Pankaj Naik, associate director (financial institutions) of India. Ratings and Research.
In 2021, the RBI replaced the boards of directors of Reliance Capital Ltd, Srei Infrastructure Ltd and Srei Equipment Finance. The central bank also initiated the Corporate Insolvency Resolution Process (CIRP) against the three defaulting NBFCs.
Dewan Housing Finance Ltd (DHFL), which was the subject of insolvency proceedings, was acquired by Piramal Enterprises in 2021. The failing company was the first NBFC to be referred to the National Company Law Tribunal (NCLT) in 2019 by the RBI.
In terms of funding, NBFCs are seeing an improvement in their access to capital.
“NBFC financing conditions are stabilizing because the banks are lending to them. Mutual funds, which had become very cautious about lending to NBFCS, also started lending. noted.
The financial system is shifting from a bank-dominated space to a hybrid one in which non-bank intermediaries are gaining in importance, according to Banking Trends and Progress in India 2020-21.
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