Infrastructure Finance NBFCs Well Poised For Growth; Industry Outlook Revised To Positive: ICRA

The overall infrastructure credit (including banks and non-banks) registered an annualised growth of 8 per cent in 9M FY2023 aided by a sharp pickup in Q3 FY2023, bucking the trend of the previous 18 months, the rating agency ICRA said on Thursday.

It said that non-banking financial companies – infrastructure finance companies (NBFC-IFCs) grew in line with the system and maintained their market share at around 54 per cent as on 31 December 2022.

The increased demand has coincided with the period during which NBFC-IFCs witnessed receding asset quality pressure, led by a few stressed asset resolutions/recoveries, sizeable write-offs, and curtailed incremental slippage. 

The stage 3 per cent eased to 3.4 per cent as on 31 March 2022 from the peak of 6.8 per cent as on 31 March  2018. The reported gross stage 3 per cent is expected to moderate further by 10-30 basis points (bps) in FY2024, supported by limited slippages and growth in the book, it added.

“NBFC-IFCs are expected to benefit from the credit demand generated by the Central Government’s ambitious targets under the National Infrastructure Pipeline (NIP) and ICRA expects them to grow by 10-12 per cent in FY2024. This, coupled with limited incremental slippages, is expected to lead to these NBFC-IFCs reporting multi-year low asset quality indicators in FY2023 and FY2024," said Manushree Saggar, Vice President and Sector Head, Financial Sector Ratings, ICRA. 

Saggar added that ICRA has revised the industry outlook for NBFC-IFCs to Positive from Stable, reflecting its expectation that the enhanced performance witnessed in FY2023 will continue in FY2024 as well, given the improvement in the solvency profile, calibrated loan book growth in the near term and better asset quality and earnings profile.” 

The central government has set a target of infrastructure investment of over Rs 111 lakh crore under the NIP and the pace of infrastructure investment is planned to be twice the past level.

The capitalisation and solvency levels of NBFC-IFCs have witnessed a respite in the recent past and the ability of these entities to grow in a calibrated manner without significantly reducing the capital cushion over the levels prescribed by the regulator will remain imperative. 

Also, the availability of long-term funding matching the underlying asset tenures remains crucial for asset-liability maturity management.

With the revival in business growth and lower credit costs, NBFC-IFCs have demonstrated a healthy profitability trajectory with their post-tax return on assets (RoMA) estimated at 2.2 per cent for 9M FY2023. ICRA expects the RoMA to improve further to 2.2-2.4 per cent in FY2024, it added.