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NEW DELHI: Despite a sharp economic recovery following the easing of curbs after the second wave of the pandemic subsided, infrastructure credit growth has slowed down. In the first nine of FY22, infrastructure-focused loan books witnessed moderate annualised growth for both non-banking finance companies (NBFCs) and banks, ratings agency Icra Ltd. said on Thursday.
The agency said a recovery was seen after the first wave of the covid-19 pandemic, with infrastructure credit growing 10% in FY21 despite having slowed down in first half of the fiscal.
While the tepidness in recent years was primarily due to the stagnation in banking sector credit to infrastructure segment, the trend in the first nine months of FY22 was characterised by moderation in the portfolio growth of IFCs as well, Icra said.
The aggregate NBFC-IFC credit book stood at ₹13.8 lakh crore as on 31 December 2021, up 6%, compared to the much stronger growth of 16% in FY21 and 14% in FY20. The public-IFC category continues to account for majority share (94%) with an aggregate loan book of ₹13.0 lakh crore as on 31 December. This is followed by private-IFCs (3.3%) with an aggregate loan book of ₹0.45 lakh crore, and IDFs (2.3%).
“Growth prospects for NBFC-IFCs are strong as demand for infrastructure credit is expected to gather pace amid the government’s resolve to focus on the infrastructure sector to revive economic growth. Consequently, NBFC-IFCs loan books are expected to grow by 10-12% in FY2023," said Manushree Saggar, vice president, financial sector ratings, Icra, said.
In terms of sectoral break-up, concentration in the power sector remains higher for IFCs with a share of 61% of the portfolio as on 31 December compared to the 52% share of the power sector in banks’ exposure to the infrastructure segment. This is because of certain NBFC-IFCs, which are specialised institutions solely focused on the power sector.
The trend over the past few years indicates receding asset quality pressures for NBFC-IFCs.
"With the improving asset quality and increased provision cover against NPAs, the aggregate solvency indicator (Net Stage 3/Net Worth) for the sector has improved considerably over the past three years to the strongest level since March 2016. Thus, with the balance sheets recuperating, the sector is relatively better placed for growth. ICRA expects the reported stage 3% to decline by further 25-30 bps supported by pending resolutions and book growth," added Deep Inder Singh, vice president, Financial Sector Ratings, Icra
NBFC-IFCs, especially those in the public sector, have reverted to a healthy profitability trajectory with the decline in the share of non-performing loans and in the cost of borrowings. This is driving healthy internal capital generation and supporting the capitalisation level. As a result, capitalisation level remains adequate with a downward bias in the gearing level in recent years, which places the industry well for medium-term growth.
Nonetheless, the capitalisation and solvency levels of IFCs have witnessed a respite only in the recent past. Hence, the ability of these entities to grow in a calibrated manner without significantly reducing the cushion in the capital over the levels prescribed by the regulator will remain imperative. Prudent capitalisation is a key mitigant against the risks in NBFC-IFCs portfolios arising out of sectoral and credit concentration and growth above 10-12% may warrant external capital raise to maintain prudent leverage.
Aasset-liability maturity profiles have improved as reliance on short-term borrowings has reduced and longer-tenor borrowings have been raised in the recent past amid favourable systemic rates.
"Given the intense competition from Public-IFCs, IDFs and banks, ICRA expects the profitability of Private-IFCs (excluding IDFs) to remain lower than its public sector peers and IDFs, until these entities can ramp up and sustain the non-interest income levels. Overall, ICRA expects post-tax RoA of 2.0-2.2% for FY2023 for NBFC-IFCs, supported by stable NIMs and moderation in credit cost," Saggar said.