Brokerage firms, rating agencies differ over FY22 NBFC outlook

Moody’s affiliate rating agency said that it expects non-performing assets (NPAs) of NBFCs to increase to 5.6-6.3% of loans at the end of March 2022 from 4.6% at the end of fiscal year 2020. NBFCs linked to auto and small businesses, especially, will remain vulnerable to the coronavirus shock.

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Access to adequate funding remains critical to the sector's revival as NBFCs continue to be impacted by moderate growth, increased competition and high credit costs in fiscal year 2022. Assets under management for retail-focused NBFCs and housing finance companies (HFCs) is expected to grow around 7%-9% next fiscal following a sluggish performance this year.

Brokerages on the other hand expect NBFCs to show improved asset quality as collection efficiency picks up and provisions cover increases. Credit Suisse, for instance, has upgraded earnings of NBFCs by 15-25% as it expects only 130-300 basis points addition to the stressed pool in the next financial year. The foreign brokerage also expects an improvement in return on assets to 10-22% in fiscal year 2022, resulting from the impact of the cost cutting measures undertaken by NBFCs during covid and better margins.

Morgan Stanley, too, believes that the NBFCs have healed considerably over the past two years since the IL&FS default in September 2018. Risk aversion and funding challenges that the sector witnessed has come off and companies have managed to maintain surplus liquidity over the past 2 years, it said. The foreign brokerage firm expects systematic rerating of some of these NBFCs as balance sheet becomes stronger, return on equity recovers and valuation gets cheaper.