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The on-book portfolio of the non-banking financial companies-housing finance companies (NBFC-HFC) sector grew to Rs. 12.2 lakh crore as of March 31, 2022, registering 11% year-on-year (YoY; 9% adjusted) growth, ratings agency ICRA said on Wednesday. 

This growth was slightly better than ICRA’s growth estimate of 8-10% for FY22 (as per our report of March 2022 and earlier). This was driven by the growth in disbursements in the last three quarters of FY2022 as the second wave of the pandemic had impacted the business volumes in Q1 FY22. 

With the expectation of momentum in disbursement growth to continue, the rating agency expects the industry to register a further increase in growth rate in FY23.

Sachin Sachdeva, Vice President and Sector Head, Financial Sector Ratings, ICRA, said, “After witnessing disruptions in the business volumes, because of the second wave of the pandemic, the industry saw a recovery in the disbursements and HFC’s portfolio growth rate started increasing during the last few quarters. This helped the industry witness improvement in portfolio growth rate in FY2022. Given the buoyancy in the disbursements, ICRA has revised its growth estimate to 10-12% for FY2023 (from 9-11% earlier)."

The industry also saw a reduction in its gross non-performing assets (GNPAs) in Q4 FY2022 after having witnessed an increase in Q3 FY2022. The tighter regulations (Reserve Bank of India’s (RBI) notification - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances – Clarifications dated November 12, 2021) on the recognition and upgradation of GNPAs led to an increase in GNPAs in Q3 FY2022, ICRA said. 

However, with the increased recoveries, the industry saw a reduction in GNPAs in Q4 FY22. The industry also saw good recoveries from the restructured book and with growth in the assets under management (AUM), the standard restructured book declined to 1.7% of AUM as on March 31, 2022 (better than ICRA’s estimate of 1.8-1.9%).

 “The decline in the GNPAs to 3.1% as of March 31, 2022, was in line with ICRA’s estimate 3.0-3.3%. The increased recovery efforts by the HFCs along with the actions taken under the SARFAESI Act, helped the industry witness an increase in collections. In addition, the overall improvement in the economic activities led to customers coming back to clear their dues. The industry reported a decline in the GNPAs by around 20 bps in Q4 FY2022, primarily driven by the decline of around 40 bps in the home loan (HL) segment. The loan against property (LAP) segment also saw some recovery, but the construction finance (CF) segment continued to witness an increase in GNPAs," added Sachdeva.

ICRA expects further improvement in the asset quality indicators in FY2023, with the expectation of improved collections from delinquent accounts. However, the performance of the restructured book would remain monitorable. The rating agency has retained its estimate of GNPAs of 2.7-3.0% as of March 31, 2023.

The HFCs have been maintaining healthy on-balance sheet liquidity for the last few quarters and have gradually reduced their reliance on short-term funding sources like CP, which has helped improve asset liability mismatches in the near-term buckets. With the reduced uncertainties and increasing interest rate scenario, HFCs are expected to reduce on-balance sheet liquidity from the currently high level, nevertheless, the same is expected to remain comfortable.

Sachdeva said, “HFC’s net earnings are expected to improve in FY2023 almost to the pre-Covid level on the back of lower credit costs and growth in scale driving the operational efficiencies. Further, the existing provision cover maintained by most HFCs would cushion the profitability, going forward. Keeping the credit costs under control would, therefore, be critical for incremental profitability."

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