Growth slows for Infrastructure finance NBFCs: ICRA

Infrastructure credit growth has slackened regardless of a sharp economic recovery following the easing of restrictions after the COVID-19 second wave abated. 

The infrastructure-focused loan books saw moderate annualised growth for both non-banking finance companies (NBFCs and banks in the first nine months of FY22, ratings agency ICRA Ltd. said on Thursday. 

The agency further stated that a recovery was witnessed after the first wave of the COVID pandemic, with infrastructure credit growing 10 per cent in FY21 despite having decelerated in the first half of the fiscal. 

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Although the tepidness in recent years was mainly due to the sluggishness in banking sector credit to infrastructure segment, the trend in the first nine months of FY22 was exhibited by moderation in the portfolio growth of infrastructure finance companies (IFCs) as well, ICRA noted.

"The aggregate NBFC-IFC credit book stood at Rs 13.8 lakh crore as on December 31, 2021, registering a sequential growth of 6 per cent (annualised) in 9M FY2022, compared to the much stronger growth of 16 per cent in FY2021 and 14 per cent in FY2020," the ratings agency said.

The Public-IFC category continues to account for majority share (94 per cent) with an aggregate loan book of Rs 13.0 lakh crore as on December 31, 2021. This is followed by Private-IFCs (3.3 per cent) with an aggregate loan book of Rs. 0.45 lakh crore and IDFs (2.3 per cent), it stated.

"The 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.

In terms of sectoral breakup, concentration in the power sector remains higher for IFCs with a share of around 61 per cent of the portfolio as on December 31, 2021, compared to the 52 per cent 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 asset quality trajectory over the past few years indicates receding asset quality pressures for NBFC-IFCs.

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"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 Public-IFCs, 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, the 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. 

The asset-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.