Tag: assets under management

NBFCs assets to improve on tailwinds, says Crisil Ratings

Banking & Finance

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Assets under management (AUM) of non-banking financial companies (NBFCs) is set to grow 8-10 per cent to about ₹30-lakh crore in FY2023, riding on two tailwinds — improving economic activity, and strengthened balance sheet buffers, according to CRISIL Ratings.

This compares with an estimated growth of 6-8 per cent this fiscal (to about ₹27 -akh crore) and 2 per cent last fiscal (about ₹25-lakh crore AUM outstanding).

However, the credit rating agency cautioned that NBFCs face three headwinds — competition from Banks, expected increase in gross non-performing assets and funding access, which is yet to fully normalise.

The agency noted that intensifying competition from banks, flush with liquidity, that have sharpened focus on retail loans.

It assessed that GNPAs are expected to increase, mostly because of the revision in recognition norms and, to some extent, due to slippages from the restructured book.

Gurpreet Chhatwal, Managing Director, CRISIL Ratings Ltd, said: “Many NBFCs have built higher liquidity, capital and provisioning buffers in the recent past.

“That, combined with improving economic activity, puts them in a comfortable position to capitalise on growth opportunities. However, competition from banks will intensify.”

Asset quality worries have also manifested due to recent regulatory clarifications, and uncertainty over the performance of the restructured book.

While home loans and gold loans will be the least impacted, unsecured, and micro, small and medium enterprises loans will bear the brunt.

Chhatwal observed that net-net, growth will be driven by NBFCs with strong parentage and better funding access in the two largest segments — home loans and vehicle finance.

CRISIL noted that organic consolidation is also underway with larger NBFCs gaining share.

In three fiscals through 2021, the market share of the top 5 NBFCs has risen 600 basis points (bps) to 46 per cent.

The agency said the ability to identify niches that cater to the relatively difficult-to-address customer segments and asset classes will fuel long-term growth for the sector.

CRISIL expects retail loans to see reasonably broad-based growth in the current and next fiscals supported by pick-up in demand and consequently underlying sales.

Gold, home and unsecured loans should clock the fastest growth rates. On the other hand, wholesale credit would continue to degrow as platforms such as alternate investment funds gain currency.

Stressed assets

The agency expects GNPAs to increase by 25-300 basis points (bps) based on asset class because of the new recognition norm.

However, the increase in GNPAs because of the revised recognition norms will be largely an accounting impact because, given the improving economy, the credit profiles of borrowers are not expected to deteriorate. Consequently, ultimate credit losses are not expected to change significantly.

CRISIL said the performance of the restructured book is a key monitorable.

The agency noted that while there has been across-the-segment improvement in the monthly collection efficiency ratio (MCR) of NBFCs for the quarter ended September 2021, the quantum of restructuring done under the RBI Resolution Framework 2.0 is more than last year.

Since this mostly involved offering moratorium, the performance of this book after moratorium is monitorable.

Overall, fragile assets (GNPAs + slippages due to the impact of regulatory norms and from the restructured book) are seen at ₹1.3-1.6 lakh crore, tantamount to 5-6 per cent of the industry’s AUM as of March 2022.

This does not factor in the impact of a third wave of Covid-19, especially the just-discovered Omicron variant, which is a risk factor.

Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings Ltd, said, “While there may be apprehensions about rising reported GNPAs, additional disclosures by NBFCs around underlying delinquency profiles and collection efficiencies can help allay them.

“Those with low leverage, high liquidity and strong parentage are expected to benefit from better funding access at optimal rates. For the rest and especially mid-sized and smaller players, co-lending, securitisation, or other partnerships with banks will facilitate a funding-light business model.”

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AUMs of NBFCs to rise 18–20% y-o-y this fiscal: Crisil Ratings.

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Assets under management (AUM) of non-banking financial companies (NBFCs), which primarily offer loans against gold, are expected to rise 18–20 per cent to ₹1.3 lakh crore this fiscal against ₹1.1 lakh crore in FY21, according to Crisil Ratings.

The credit rating agency said that this growth would be despite a contraction in the first quarter, when pandemic-driven lockdown measures hindered branch operations and kept potential borrowers away.

The agency added that demand for gold loans from micro enterprises and individuals — to fund working capital and personal requirements, respectively — has increased with a pick-up in economic activity and the onset of the festive season, which coincides with the easing of lockdown restrictions by several States.

Sought-after asset

Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, said, “Gold-loan disbursements have rebounded sharply in the second quarter of this fiscal after a dismal first quarter. We expect this momentum to continue for the rest of this fiscal.”

He emphasised that gold loans will continue to be a sought-after asset class, while lenders would remain cautious about growth in many other retail asset classes.

Also see: NBFCs: No need to press the panic button yet

From a credit perspective, gold loans are a highly secured, liquid asset class that generates superior returns with minimal credit losses, the agency said.

Therefore, NBFCs that offer them are better placed than those extending loans to most other retail asset classes, especially in times of asset-quality pressure spawned by the pandemic.

Risk management

The agency noted that historically, gold-loan NBFCs have seen negligible losses because of robust risk management practices such as periodic interest collection (which keeps the loan-to-value, or LTV, under check) and timely auctions of gold.

Also see: What’s next for gold loans after the pandemic?

“Maintaining LTV discipline adds to the comfort. But sharp swings in the price of gold impacts both, the portfolio and disbursement LTV, as it influences the cushion available with lenders.

“Lenders faced this issue last fiscal because gold prices fell sharply between January and March 2021, after the August 2020 peak,” the agency said.

NBFCs vs banks

On their part, NBFCs have manoeuvred the situation well, Crisil Ratings said, adding that banks, on the contrary, were less proactive and so have seen a rise in delinquencies and faced challenges in rolling over a part of their portfolio to 75 per cent LTV (as per current Reserve Bank of India guidelines) after the 90 per cent LTV dispensation ended in March 31, 2021.

Banks’ loan against gold jewellery portfolio grew by about 80 per cent in FY21.

Ajit Velonie, Director, Crisil Ratings, observed that gold-loan NBFCs have been swift in calibrating disbursement LTV while also implementing strong risk management practices to keep portfolio LTV in check.

Also see: IIFL Finance launches instant business loan on WhatsApp

Besides ensuring periodic interest collection, they do not flinch from conducting auctions when required — which rose sharply in March and April 2021 — to avert potential asset-quality challenges.

Velonie said timely auctions have ensured that credit costs — a more appropriate indicator of asset quality for gold-loans — remained in check at 30 basis points, well within the historical range.

With leverage being low and pre-provision profitability remaining strong, Crisil Ratings expects the overall credit profile of gold-loan NBFCs to remain stable.

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Bank loans to NBFCs grow slower as credit to small lenders dries up

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Both banks and non-bank lenders reported a deterioration in asset quality during the April-June quarter in loan categories. (Representational image)

The growth in outstanding bank loans to non-banking financial companies (NBFCs) has slowed down significantly on a year-on-year (y-o-y) basis in 2021, according to data released by the Reserve Bank of India (RBI). Industry executives said that the phenomenon is a result of credit to smaller NBFCs drying up amid heightened caution on the part of banks.

Credit outstanding to non-bank lenders has been growing in the low single digits through much of the current year, with banks’ NBFC book actually shrinking 2.2% y-o-y in June 2021. The growth rate moved back into positive territory in July, though it remained at a muted 0.5%. This is in contrast to the 20-36% growth rates seen every month during the comparable period of 2020, when the pandemic first broke out in India.

NBFC industry executives said that liquidity is not a problem for the larger players, but smaller lenders have been finding it difficult to access bank loans. Ramesh Iyer, vice-chairman and managing director, Mahindra & Mahindra Financial Services, told FE that there is a need to look at the situation of smaller NBFCs to put things in perspective. “I’ve been hearing that small NBFCs are not able to get money from banks. That could be one reason (why credit growth is slower),” he said.

nbfc loan growth

Bankers admit in private conversations that they are being cautious while lending to some NBFCs, especially those who have faced difficulties with respect to collections during the pandemic. “Last year banks were being cautious because of Covid, but later we saw that NBFCs were able to manage well. The second wave has again made things difficult because collections were affected badly,” said a senior executive with a public-sector bank.

Both banks and non-bank lenders reported a deterioration in asset quality during the April-June quarter in loan categories where cash collections predominate. Gold loans, commercial vehicle (CV) loans and microfinance saw slippages rise in Q1FY22 as the second wave of Covid-19 hurt the collection effort. There was also no moratorium on repayments, unlike in 2020, which made the stress more evident on lenders’ books.

In a recent presentation, analysts at India Ratings and Research said that a trend of consolidation and polarisation is emerging in the NBFC segment, with AA+ and above-rated NBFCs growing their assets under management (AUMs) much faster than A+, A and A- rated non-banks. In terms of asset classes, NBFCs focused on real estate have seen their AUMs stagnating as a result of a funding crunch and other sector-specific challenges. In the first quarter of FY22, retail NBFCs also saw a drop in AUMs largely due to the second wave of Covid.

The rating agency also expects the funding environment for smaller microfinance institutions (MFIs) to remain challenging. “For most large MFIs (assets under management above Rs 5,000 crore or large sponsor backed), bank funding lines could continue and hence they may not face immediate liquidity stress. That being said, small and mid-size MFIs would need to conserve liquidity and hence their disbursements could be constrained, this could lead to lag in their performance,” India Ratings analysts said.

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PFRDA throws FDI door wide open for Pension Funds

Banking & Finance

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The legal decks have now been cleared for foreign companies to hold — directly or indirectly — up to 74 per cent stake in pension funds with the pension regulator PFRDA notifying the new revised limit. Foreign investment limit in pension funds was earlier capped at 49 per cent.

The Pension Fund Regulatory and Development Authority (PFRDA) has for this purpose amended the Pension Fund regulations. This latest move comes on the heels of the pension regulator opening from June 30 an “on tap” window for grant of licences for pension fund managers. Such a window allows applicants to seek licence at any time, thereby quickening the entire process on setting up business.

In India, pension funds would have to necessarily operate as corporate entities.

With the latest move, the FDI limit in pension funds are aligned with that of insurance sector. In March this year, Parliament had given its approval for raising FDI limit in insurance sector to 74 per cent from 49 per cent. Finance Minister Nirmala Sitharaman had, in her Budget speech this year, announced an increase in FDI limit in insurance sector to 74 per cent from 49 per cent earlier.

It maybe recalled that the PFRDA Act links the FDI ceiling for the pension sector to the ceiling level prescribed for the insurance sector.

Prior to the latest PFRDA move, the regulations stipulated in the eligibility criteria mentioned that an applicant, for being a sponsor of a pension fund, cannot hold more than 49 per cent stake in the pension fund.

The FDI limit hike in pension funds comes at a time when India’s pension assets under management (AUM) are growing at a frenetic pace and touched ₹6.2-lakh crore, as of July 10 this year.

PFRDA Chairman Supratim Bandyopadhyay had in May this year said that PFRDA was now looking at an AUM target of ₹7.5-lakh crore by the end of March 2022.

In the last two years, PFRDA has been taking several steps to enhance the number of players in the pension sector. It had revamped the fee structure for pension fund managers and revised the capital requirement criteria for sponsors so that both of them are strong enough to ride the current growth wave in the pension sector.

A sponsor — individually or jointly — should now have atleast ₹25 crore in paid-up capital on the date of making application as a sponsor and positive tangible net worth of atleast ₹50 crore on the last date of each of the preceding five financial years.

There are now eight Pension Fund managers for the National Pension System in the country — SBI Pension Fund, LIC Pension Fund, UTI Retirement Solutions, HDFC Pension Management, ICICI Prudential Pension Fund, Kotak Mahindra Pension Fund Aditya Birla Sun Life Pension Management and Axis asset management (the most recent entrant and whose pension fund is yet to be operationalised).

PFRDA expects India’s pension sector assets to grow to ₹30 lakh crore by 2030 and this could be a good reason why more foreign pension fund management players could look “more seriously” at entering India in next few years, say pension industry observers. Also the fact that foreign companies can now have controlling interest in the pension funds in India will encourage them to enter this market, they added.

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Indostar Capital to reduce corporate loan book to less than 10% of AUM

Banking & Finance

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Indostar Capital Finance Ltd is planning to reduce its corporate loan book to less than 10 per cent of Assets Under Management (AUM) by March 2022 from 22 per cent as at March-end 2021.

As part of its plan to build a 100 per cent retail company, the non-banking finance company (NBFC) increased the share of retail finance (commercial vehicle/CV finance, SME finance and housing finance) in AUM to 78 per cent as at March-end 2021 against 71 per cent as at March-end 2020.

Total AUM came down about 13 per cent year-on-year (yoy) to stand at ₹8,398 crore as at March-end 2021 from ₹9,690 crore as at March-end 2020, as per the NBFC’s investor presentation.

Also read: IndoStar Capital Finance plans to focus exclusively on retail lending

Of the disbursement of ₹863.50 crore in Q4FY21 (up 18 per cent yoy), 98 per cent was to the retail segment and only 2 per cent was to the corporate segment, it added.

In its outlook for FY22, Indostar Capital,whose promoter and promoter group include BCP V Multiple Holdings Pte Ltd (52.06 per cent stake) and Indostar Capital (38.47 per cent), said it has substantial growth capital to pursue calibrated growth. It will focus on high yield used CV & affordable housing.

“Brought Brookfield (BCP V Multiple Holdings Pte. Ltd) as partner with ₹1,225 crore primary capital (in May 2020) and strengthened capital adequacy and liquidity. Robust equity, comfortable liquidity…form the foundation for future growth ahead,” the presentation said.

Meanwhile, the standalone net loss of Indostar Capital Finance narrowed to ₹312 crore in the fourth quarter of FY21 against ₹420 crore in the year ago period.

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Pension AUM cross ₹6-lakh crore: PFRDA Chief

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The pension Assets Under Management (AUM) have reached a new milestone and crossed the ₹6-lakh crore mark two days back, Pension Fund Regulatory and Development Authority (PFRDA) Chairman, Supratim Bandyopadhyay, has said. It has just taken seven months for addition of ₹1-lakh crore in AUM, which crossed the ₹5-lakh crore mark in October 2020.

“We had initially thought this ₹6-lakh crore AUM would be achieved by end March 2021. But we had missed it out due to market conditions. However, within one-and-half months we have now reached the ₹6-lakh crore level,” Bandyopadhyay told BusinessLine.

It maybe recalled that the pension AUM, as of end March 2021, stood at ₹5.78-lakh crore (₹4.17-lakh crore as of end March 2020).

Bandyopadhyay said that the PFRDA was now looking at an AUM target of ₹7.5-lakh crore by the end March 2022. “I am happy that whatever projections we had made two years back.. we are on track. At this rate, I believe we are on path to reach the projected level of ₹30-lakh crore by the year 2030,” he added.

Variable annuities

Bandyopadhyay said that work is on towards amendments to the PFRDA Act and once this gets Parliament nod, then pension fund managers and even the PFRDA will be in a position to roll out other payout products (such as systematic withdrawal plan) that will be distinct from annuities.

He highlighted that annuity rates in the market have fallen and many retirees are unhappy about the current level of returns.

The need for variable annuities – where the returns vary according to the market related benchmark – has all the more increased, given that annuity rates have fallen in line with sharp fall in interest rates in the system.

Meanwhile, the PFRDA Board has given approval for National Pension System (NPS) subscribers with corpus up to ₹5 lakh to withdraw their accumulations on retirement funds without mandating their investment in annuities. “This decision is expected to be shortly notified. We are also alerted our CRAs to be ready with the changes,” Bandyopadhyay said.

The pension regulator’s Board has also approved extension to the maximum entry age for availing the NPS benefits to 70 years from the current 65 years. Simultaneously, the exit age limit is also being extended from 70 years to 75 years. “This decision will be notified soon and will get implemented this year,” he added.

MARS

The PFRDA has floated a request for proposal (RFP) to appoint a consultant to design Minimum Assured Return Scheme (MARS) under the NPS.

The whole idea behind having MARS is to have a separate scheme that can offer a guaranteed minimum rate of return to NPS subscribers, especially those who are risk averse. Currently, the NPS gives returns annually, based on prevailing market conditions.

The appointed consultant, with requisite actuarial skills, is expected to help formulate/design a MARS that can be offered to the existing and prospective subscribers by pension funds.

The chosen consultant is also expected to set up a procedure to evaluate and approve basic scheme design modifications by pension funds and supervise MARS. The consultant would be required to prescribe fees, solvency requirements, risk management and reporting mechanisms for pension funds in respect of MARS, according to the RFP document.

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NBFC AUM growth would revive in FY22 to about 7-9%: Icra

Banking & Finance

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Smaller and mid-sized entities with an AUM of under Rs 20,000 crore expect higher growth rate compared to their larger peers.

Growth in non-banking financial companies’ (NBFC) assets under management (AUM) is likely to recover to about 7-9% in FY22 from a flattish performance in FY21, rating agency Icra said on Wednesday. In order to achieve this rate of growth, they will have to raise Rs 1.9-2.2 lakh crore, in addition to refinancing existing lines. The rating agency carried out a survey across non-banks, involving about 60 entities, together accounting for over 50% of the sectoral AUM and about 23 investors. The survey revealed that more housing finance companies (HFCs) expect growth of over 10% as compared to NBFCs. Also, smaller and mid-sized entities with an AUM of under Rs 20,000 crore expect higher growth rate compared to their larger peers. However, investors have a relatively muted growth outlook.

A M Karthik, vice president and sector head – financial sector ratings, Icra, said that growth in FY22 is likely to be driven by the improvement in demand from all the key target segments. Some of the key segments which would bolster growth include gold loans, home loans, personal credit, rural finance and microfinance. Growth in the vehicle finance and business loans segments, which are closely linked to economic activity, are expected to take longer to register a reasonable revival.

Non-bank exposures to commercial real estate and other large corporate or wholesale exposures are expected to register a decline even in FY22 after the decline of about 15% in FY20 and a 10% expected contraction in FY21. “As per the survey, majority (~70%) of issuers and investors do not expect co-lending to account for less than 10% of non-bank AUM over the next two-three years. Access to adequate funding, therefore, would remain critical for the sector to register a sustained improvement in growth,” Karthik said.

Growth would be contingent upon the access to adequate funding lines. Incremental bank loans to non-banks, considering their high sectoral exposure to the NBFC segment, remains to be seen and would, in turn, depend on overall bank credit growth. Mutual funds registered some improvement in their exposures to non-banks over the recent past, but their sustainability will be critical. An expected improvement in securitisation volumes in FY22 after the sharp contraction in FY21 and access to funding from other sources, including retail or overseas lenders or investors, would be key for sustainable growth.

Icra expects the slippages from the restructured book (estimated at 4-6% of AUM) to keep NBFC non-performing assets (NPAs) at elevated levels even in FY22 after an increase of up to 200 basis points (bps) in FY21. This is after considering that entities, especially those having retail exposures, would prefer to write off sticky overdues, in view of the provision build-up, adequate earning performance and their comfortable capital structures. Collection efficiency, notwithstanding the improvement since April 2020, remains about 5-15% lower than pre-Covid levels, thereby exerting pressure on their current asset quality.

“While part of the stress could get restructured, slippages would increase in H2FY21. As per the survey, ~90% of the investors expect the NPAs to increase by about 100-200 bps by March 2021 vis-a-vis 40% of the issuers. Further, another 40% of the issuers expect the NPAs to remain stable vis-a-vis March 2020 levels,” Icra said.

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