Asset quality in NBFCs, HFCs improves in Q4FY22 on lower slippages: Icra

Non-banking financial companies (NBFCs) and housing finance firms witnessed an improvement in their asset quality in the fourth quarter of FY22, helped by minimal impact of Omicron variant of COVID-19 and lower slippages from restructured book, a report said on Monday.

The gross stage 3 assets (loans overdue for more than 90 days) for NBFCs reduced to 4.4 per cent in March 2022 from 5.7 per cent in December 2021, Icra Ratings said in a report.

HFCs' (Housing Finance Companies) gross stage 3 assets moderated and stood at 3.3 per cent vis--vis 3.6 per cent in December 2021, the report said.

"NBFCs and HFCs registered an improvement in their asset quality in Q4 FY22 as the impact of the Omicron variant of Covid-19 was minimal and the slippage from the restructured book was lower," it said.

The agency said that entities augmented their collections in view of the tighter Income Recognition, Asset Classification and Provision (IRAC) norms, which are applicable from October 2022. NBFC write-offs remained elevated and marginally higher than the last fiscal, while HFC write-offs were modest.

The agency's Vice President (Financial Sector Ratings) A M Karthik said the slippage from the restructured book, especially for NBFCs, was lower than expected, which also favourably contributed to the asset quality performance.

The standard restructured book of NBFCs is estimated to have reduced to 2.7-3 per cent in March 2022 from the peak of 4.5 per cent in September 2021, while the same for HFCs moderated to 1.4-1.6 per cent from 2.2 per cent during the above-mentioned period.

"The performance of this book would remain monitorable, considering the weakening macroeconomic/operating environment and the balloon repayment schedule of some of these loans," Karthik said.

Although the gross stage 3 asset has moderated, these entities would provide them with some room to deal with pressure on margin in the current fiscal as their borrowing rates are going up.

As a base case, the agency expects NBFC/HFC net profitability return on average managed assets (RoMA) for FY23 to remain at the same levels as the last fiscal.

"NBFC and HFC RoMA for FY23 are expected to be around 2.3-2.5 per cent and 1.6-1.8 per cent, respectively, similar to FY22 levels," he said.