FY23 Outlook: Focus of NBFCs Shifts To Growth Amid Normalisation

India Ratings and Research (Ind-Ra) has maintained a neutral sector outlook and a Stable rating Outlook for non-banking finance companies (NBFCs) for FY23. Ind-Ra believes FY23, in absence of any negative event, would see normalisation of business activities, after facing challenges in the past few years following the default by Infrastructure Leasing & Financial Services Ltd ('IND D') leading to liquidity challenges and then the COVID-19 pandemic. NBFCs would begin the year with sufficient capital buffers, stable margins and sizeable on-balance sheet provisioning, while adequate system liquidity would aid funding. Nevertheless, an expected increase in systemic interest rates and asset quality issues in some segments due to the lagged impact of pandemic would be a drag on the operating performance.

The sector has been facing increased regulatory oversight and push towards convergence with banks through various measures such as scale-based regulation, realignment in asset quality classification and Prompt Corrective Action norm. The incremental impact of the notification on NPA recognition however will be moderate as the maximum impact has already been seen in 3QFY22 figures and NBFCs are holding adequate provisions.

Secured Asset Business Could See Revival

Ind-Ra expects NBFCs to maintain loan growth of around 14% yoy in FY23, with FY22 growth closing at 7%-8%. Ind-Ra thus believes FY23 could be a year of normalcy in disbursements. The products such as loans against property, housing loans and vehicle finance could witness a higher demand than personal and unsecured business loans which saw a higher demand during the pandemic. Growth in the vehicle finance segment could revive depending on the availability of vehicles which are facing component shortage due to the pandemic, along with an increase in borrower confidence towards an economic recovery.

The gold loan segment could see moderate growth in tandem with gold prices along with opening up of other financing avenues for borrowers. Loans against property would see reasonable growth as it would remain the prime source for borrowers to avail loans for working capital or growth capital. Lenders in the personal loan and business loan segments in the unsecured category are likely to remain among the most impacted asset classes and lenders thus would remain cautious. In this aspect, supply chain financing where the obligations of lenders remain on strong anchors could gain traction. Tractor financing could remain stable with growth being in line with that of the agriculture sector and government rural spend.