Rating agency ICRA Ltd has revised its outlook to positive from stable for non-banking financial companies - infrastructure finance companies (NBFC-IFCs) on expectations of a continuation of enhanced performance in FY23-24.
In a note, ICRA says overall infrastructure credit (including banks and non-banks) registered an annualised growth of 8% in the first nine months (9M) of FY22-23, aided by a sharp pickup in the third quarter (Q3) of FY22-23, bucking the trend of the previous 18 months. NBFC-IFCs grew in line with the system and maintained their market share at around 54% as of 31 December 2022.
"The increased demand has coincided with the period during which NBFC-IFCs witnessed receding asset quality pressure, led by a few stressed asset resolutions and recoveries, sizeable write-offs, and curtailed incremental slippages. The stage 3% eased to 3.4% on 31 March 2022 from the peak of 6.8% on 31 March 2018. The reported gross stage 3% is expected to moderate further by 10-30 basis points (bps) in FY23-24, supported by limited slippages and growth in the book," the rating agency says.
According to Manushree Saggar, vice president and sector head for financial sector ratings of ICRA, NBFC-IFCs are expected to benefit from the credit demand generated by the Union government's ambitious targets under the national infrastructure pipeline (NIP) and ICRA expects them to grow by 10%-12% in FY2024.
"This, coupled with limited incremental slippages, is expected to lead to these NBFC-IFCs reporting multi-year low asset quality indicators (lowest in last six years) in FY22-23 and FY23-24. ICRA has revised the industry outlook for NBFC-IFCs to positive from stable, reflecting its expectation that the enhanced performance witnessed in FY22-23 will continue in FY23-24 as well, given the improvement in the solvency profile, calibrated loan book growth in the near term and better asset quality and earnings profile," she says.
The Union government has set a target of infrastructure investment of over Rs111 lakh crore under the NIP and the pace of infrastructure investment is planned to be twice the past level.
According to ICRA, the capitalisation and solvency levels of NBFC-IFCs have witnessed a respite in the recent past and the ability of these entities to grow in a calibrated manner without significantly reducing the capital cushion over the levels prescribed by the regulator will remain imperative. Also, it says, the availability of long-term funding matching the underlying asset tenures remains imperative for asset-liability maturity management.
"With the revival in business growth and lower credit costs, NBFC-IFCs have demonstrated a healthy profitability trajectory with their post-tax return on assets (RoMA) estimated at 2.2% for 9M FY22-23. ICRA expects the RoMA to improve further to 2.2-2.4% in FY23-24," the rating agency added.