HFCs better placed than other NBFCs in terms of asset quality: Report

Housing finance companies or HFCs are better placed in terms of asset quality than other NBFCs as their NPAs would be far less than other NBFCs in FY'21 following the economic impact on account of the nation-wide lockdown, post COVID-19 pandemic. Also HFCs have much fewer assets under moratorium, according to a report by ratings firm Icra.

HFCs could see non-performing assets (NPAs) sore to 3.4-4.8 per cent by March'21. But other NBFCs asset quality is likely to be more impacted than FCs, with the segmental NPA touching 7.0-9.5% by March 2021, Icra said.

“Portfolio under moratorium for some large NBFCs is as high as 70- 80%, with the sectoral average of about 52%, while for HFCs the average is about 28% " said A M Karthik, Vice President and Sector Head, Financial Sector Ratings ICRA "The additional covid-19 -related provision carried by NBFCs is about 0.7% (of the AUM), while for HFCs is about 0.2%."

Icra expects the asset quality of NBFCs to weaken sharply in the current fiscal as the Covid-19-related lockdowns have significantly disrupted the borrower level cash-flow, which may recover only over a prolonged period. While the moratorium extended by the non-banks to its borrowers is likely to give them the much-needed breathing space; the asset quality performance of the non-banks is likely to see sizeable dislocation from the recent trends. Assuming a slippage of 5-10% of the asset under management (AUM) under moratorium, Non- bank NPAs could increase to 5.0-7.0% by March 2021 from about 3.3-3.4% in March 2020, Icra said in a release.

"The envisaged sharp increase in the stage-3 assets post moratorium window and weak economic indicators would warrant entities to further revise their expected credit loss models and increase provisions thus impacting their earnings.” Karthik said.

The expected stagnation in the NBFCs assets, increase in the on-balance sheet liquidity along with increased credit cost would result in the net profitability indicators-Return on average managed assets- to halve for FY'21 vis a vis the FY'20 levels of about 2.1-2.2%. Credit cost for non-banks are expected to increase to 2.5-3.0% from around 1.5% in FY'20 Icra said.