FAA upgrades non-bank lenders to neutral, outlook unchanged

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FAA upgrades non-bank lenders to neutral, outlook unchanged

On Tuesday, the domestic rating agency upgraded its outlook on non-bank lenders to neutral from improving collection efficiencies and asset growth in the sector.

It said that liability management is the key for managing margins and loan growth for non-bank companies NBFCs and housing companies HFCs, and that with the onset of normalcy in lending the on- balance sheet liquidity would normalise, negating the impact of rising costs and protecting margins to a certain extent.

In the mid-year outlook on the sector, it said that a lower credit cost for 2 HFY 23 would aid profitability during the fiscal.

It said that the festive season demand could support the baseline credit offtake and that demand normalisation may be deterred in the near term due to higher inflationary pressure on borrowers and interest rates.

The agency said it had seen a strong asset performance in the first half of FY 23 which leads it to a stable rating outlook for outstanding transactions in the second half of the fiscal.

It expects securitisation volumes to reach pre-COVID levels, subject to stabilised market sentiments.

The agency said that the non-bank regulatory framework will aid transparency in disclosure standards and reporting alignment with banks with the introduction of the prompt corrective action framework and the revision of non-performing asset NPA recognition norms.

The agency expects to include HFCs to report around 14 per cent growth in the AUM assets under management in FY 23.

Credit cost would remain stable due to adequate provisions built-in, as per the new NPA recognition norms setting in from October 1, 2022, which could lead to a rise in FY 23 from 4.6 per cent in Q 1 FY 23 and to 3 per cent from 2.7 per cent for HFCs, according to Jinay Gala, its associate director.

Commercial vehicles should see a gradual recovery with the collection efficiency on an improving trend, but the inflationary pressure on borrowers' income profiles could cause debt servicing challenges, leading to pressure on softer delinquencies, it said.

Non-banks would normalise in H2 FY 23 on an overall basis, with the focus being on margin stability in the rising interest rate environment and gathering adequate liquidity for managing growth.

It said there could be a rise in short-term borrowings to maintain the cost of funds, but it needs to be calibrated with asset-liability risk.