Asset quality headwinds to impact retail NBFC net earnings in FY22: ICRA

The growth in assets under management (AUMs) of retail non-banking financial company (retail NBFC) sector is expected to revive in FY22 to about 8 to 10 per cent as compared to an estimated growth of a muted 3 to 5 per cent in FY2021, according to investment information agency ICRA.

The AUM growth, however, is expected to be slower than past trends when it grew at a compound annual growth rate (CAGR) of 18 per cent between March 2016 to March 2020.

"Localised lockdowns in view of the recent surge in Covid-19 infection rates can impact a sustainable revival and will remain a near-term monitorable," said ICRA.

Asset quality issues visible in Q3 FY21 are expected to remain elevated in Q4 FY21 and play out fully in FY22.

ICRA expects incremental slippages to keep non-performing assets (NPAs)/gross stage 3 assets at elevated levels even in FY22 after an increase in FY21 as the level of economic activities are yet to substantially pick up over the pre-Covid levels.

The increase is expected to be about by about 50 to 100 bps (over December 2020 levels) by March 2022 as a base case and could inch-up further if the impact of the impact of the pandemic continues for longer period leading to lockdowns or other tighter restrictions.

ICRA said restructuring has been lower than expected. However, loan losses and write offs have increased in Q3FY21. Entities nevertheless continue to maintain higher provisions (about 50 per cent higher than pre-Covid levels), which presently is a buffer.

The increase in infection rates in recent past and localised lockdowns/restrictions in a few states have increased near-term uncertainties. Thus entities may carry higher provisions at least over the next few quarters and credit cost is expected to remain elevated.

The profitability indicators were impacted in FY21 as provision and credit costs increased sharply due to the expected portfolio stress and will remain at similar levels even in FY22.

ICRA said the expectation of high incremental slippages and slower growth versus past trends even in FY22 will keep the profitability 30 per cent below the pre-Covid levels. The capital structure is expected to remain adequate.

While some entities raised fresh equity in FY21, ICRA said that moderate growth expectations even in FY22 notwithstanding the reduction in internal generation because of weakening in earnings performance will not necessitate any significant fresh capital raise in the near term.

( With inputs from ANI )