Growth slows for infrastructure finance in Nbfcs: Icra report

NEW DELHI: Infrastructure lending growth has slowed despite a strong economic recovery following the easing of restrictions after the second wave of the pandemic subsided. In the first nine years of FY22, infrastructure-based loan books posted moderate annualized growth for both non-bank financial corporations (NBFCs) and banks, rating agency Icra Ltd said. on Thursday.

The agency said a recovery was seen after the first wave of the Covid-19 pandemic, with infrastructure lending growing 10% in FY21, although it had slowed in the first half of the fiscal year.

While the slack in recent years was primarily due to stagnation in the credit-to-infrastructure segment of the banking sector, the trend in the first nine months of FY22 was also characterized by moderate portfolio growth of IFCs, Icra said.

The entire NBFC-IFC loan book stood by 13.8 lakh crore as of December 31, 2021, up 6% compared to much stronger growth of 16% in FY21 and 14% in FY20. The IFC public category remains in the majority (94%) with a total loan portfolio of 13.0 lakh crore as of 31 December. This is followed by private IFCs (3.3%) with a total loan book of 0.45 lakh crore and IDFs (2.3%).

“The growth prospects for NBFC-IFCs are strong as infrastructure credit demand is expected to pick up momentum as the government decided to focus on the infrastructure sector to revitalize economic growth. Consequently, NBFC-IFCs loan books are expected to grow 10-12% in FY2023,” said Manushree Saggar, Vice President, Financial Sector Ratings, Icra.

In terms of sector breakdown, energy sector concentration remains higher for IFCs, accounting for 61% of the portfolio as at 31 December, compared to energy sector’s 52% share of banks’ infrastructure segment exposure. This is due to certain NBFC-IFCs, which are specialized institutions solely focused on the energy sector.

The trend of the last few years indicates a decreasing quality pressure for NBFC IFCs.

“With improved asset quality and increased provisioning versus NPAs, the aggregate solvency indicator (Net Stage 3/Net Worth) for the sector has improved significantly over the past three years to the strongest level since March 2016. So With The Balance Sheets “The sector is recovering relatively better for growth. ICRA expects the reported 3% streak to decline an additional 25-30 basis points, supported by pending resolutions and book growth,” added Deep Inder Singh, Vice President, Financial Sector Ratings, Icra

NBFC-IFCs, particularly in the public sector, have returned to a healthy profitability path as the ratio of non-performing loans and borrowing costs declined. This encourages healthy internal capital generation and supports capitalization levels. As a result, the level of capitalization remains reasonable, with the level of gearing trending downwards in recent years, positioning the industry well for medium-term growth.

However, it is only in the recent past that IFCs’ capitalization and solvency have experienced a respite. Therefore, the ability of these companies to grow in a calibrated manner without materially reducing the capital buffer beyond levels mandated by the regulator will remain imperative. Prudent capitalization is an important measure to mitigate the risks in NBFC-IFC portfolios resulting from sector and credit concentration and growth in excess of 10-12% may justify raising external capital to maintain prudent leverage.

Asset and liability maturity profiles have improved as reliance on short-term borrowing has decreased and borrowing with longer maturities has been taken out more recently in the face of favorable systemic interest rates.

“In the face of intense competition from public IFCs, IDFs and banks, ICRA believes that the profitability of private IFCs (excluding IDFs) will remain lower than their public sector peers and IDFs until these companies grow and sustain their non-interest income Overall, ICRA expects an after-tax RoA of 2.0-2.2% for NBFC-IFCs for fiscal 2023, supported by stable NIMs and modest borrowing costs,” Saggar said.

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