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MUMBAI : Non-banking financial companies' (NBFCs) asset under management (AUM) is likely to grow 8-10% in the fiscal 2023, helped by improvement in economic activity and strengthened balance sheet buffers, according to a report by Crisil Ratings.

The agency expects AUM growth to be at 6-8% in fiscal 2022. The growth in the previous fiscal was 2%.

The gross non-performing assets (GNPAs) of non-bank lenders are expected to rise by 25-300 basis points based on asset class following recent clarification on income recognition, asset classification and provisioning (IRAC) norms, Crisil said in a report on Monday.

"After weathering multiple challenges over the past three fiscals, AUM of NBFCs and housing finance companies (HFCs) is set to grow 8-10 per cent next fiscal, riding on two tailwinds — improving economic activity, and strengthened balance sheet buffers," the agency said.

Its Managing Director Gurpreet Chhatwal said that many NBFCs have built higher liquidity, capital and provisioning buffers in the recent past.

"That, combined with improving economic activity, puts them in a comfortable position to capitalise on growth opportunities," he said.

Retail loans are expected to see reasonably broad-based growth in the current and next fiscals supported by pick-up in demand and consequently underlying sales, the report said.

Gold, home and unsecured loans should clock the fastest growth rates, it said.

On the other hand, wholesale credit would continue to degrow as platforms such as alternate investment funds gain currency.

In terms of asset quality, the change in the RBI's NPA recognition norm to a daily due-date basis instead of the month-end will have implications, the agency said.

“We expect GNPAs to increase by 25-300 bps based on asset class because of the new recognition norm," it said.

While home loans and gold loans will be the least impacted, unsecured, and micro, small and medium enterprises loans will bear the brunt.

However, the increase in GNPAs because of the revised recognition norms will be largely an accounting impact because, given the improving economy, the credit profiles of borrowers are not expected to deteriorate, it said.

Consequently, ultimate credit losses are not expected to change significantly the report said.

Overall, fragile assets (GNPAs + slippages due to the impact of regulatory norms and from the restructured book) are seen at 1.3-1.6 lakh crore, tantamount to 5-6% of the industry's AUM as of March 2022, the agency said.

This, however, does not factor in the impact of a third wave of Covid-19, especially the just-discovered Omicron variant, which is a risk factor.

The agency's Senior Director and Deputy Chief Ratings Officer Krishnan Sitaraman said, “While there may be apprehensions about rising reported GNPAs, additional disclosures by NBFCs around underlying delinquency profiles and collection efficiencies can help allay them."

Those with low leverage, high liquidity and strong parentage are expected to benefit from better funding access at optimal rates, he said.

For the rest and especially mid-sized and smaller players, co-lending, securitisation, or other partnerships with banks will facilitate a funding-light business model, Sitaraman said. 

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