Having weathered Covid-19 well, their stronger balance sheet should enable NBFC-IFCs to be a vital partner in the implementation of NIP agenda.
By Manushree Saggar & Deep Singh
Infrastructure finance non-bank companies (NBFC-IFCs) have remained largely resilient to the Covid-19 crisis. While growth of NBFC-IFCs moderated over the last two years, the asset quality indicators have improved and, with a higher provision coverage (64% as of March 31, 2021, the strongest level since March 2016), their solvency too has improved. Moderate growth and healthy internal accruals have led to a decline in leverage, giving the entities further headroom for growth in the medium term. Improved systemic liquidity and consequent softening of cost of borrowings has also supported the earnings profile. Thus, the outlook for the sector is ‘Stable’ despite a challenging operating environment.
With infra credit penetration to GDP estimated at 10.9% as of March 31, 2021 compared to 12.4% in 2015 and 10-year average of ~11.4%, the growth potential is encouraging. This growth will be well supported by the government of India’s investment target of Rs 111 lakh crore under the National Infrastructure Pipeline (NIP) till 2025. A stronger NBFC-IFC balance sheet therefore will enable them to be a partner in this evolving growth story. At the same time, timely resolution of existing stressed assets would be critical for sustained improvement in the credit profile of these entities.
As for recent trends for NBFC-IFCs, their portfolio growth was flat in Q1FY2022, after improving in H2FY2021. In FY2021, while IFCs reported healthy credit growth of 16%, banks reported just 4% growth; the former were also helped by the Centre’s liquidity package for discoms, besides continued growth in IRFCs assets under management. Consequently, IFCs’ share in total infrastructure credit increased to 54% as of March 31, 2021 (from 39% five years ago) vis-a vis banks’ share of 46%.
Going forward, as resolution/recoveries gather pace, the improvement in asset quality indicators is expected to continue. The reported stage 3% for these entities declined to 4.1% as of March 31, 2021 (peak level of 7.3% on March 31, 2018) and remained stable at the end of Q1FY22. However, stage 2%, which is driven by state sector customers, was volatile and at elevated levels even as incremental slippages were controlled. As of March 31, 2021, the proportion of IFC portfolio restructuring was less than 1%; and the impact of the second wave has been negligible. This, coupled with further resolution of pending stressed assets in the near term, could lead to a further improvement in IFCs’ asset quality indicators.
In terms of portfolio vulnerability, solar and wind projects backed by relatively weaker credit promoter group and higher exposure to state discoms with extended receivable cycles, remain a monitorable. Also, NBFC-IFCs continue to face high concentration risks, thereby making them prone to lumpy slippages.
The ALM profile of IFCs, which was characterised by sizeable cumulative negative mismatches in the up to one-year buckets, improved in recent quarters, with long-term funds replacing short-term borrowings, supported by favourable systemic rates and higher on-balance sheet liquidity. However, the trend may not continue over the longer term. Hence, the liquidity profile of these entities is expected to remain dependent on their refinancing ability. Significantly, most IFCs maintain adequate sanctioned but undrawn bank lines to plug the ALM mismatches and enjoy healthy financial flexibility given their strong parentage.
With favourable borrowing cost trajectory and steady decline in non-performing loans, Public-IFCs achieved better RoA of 1.8% in FY2021 (six-year average 1.7%); however, the profitability of Private-IFCs remains considerably lower with a sub-par RoA of 1.19% (five-year average 1.21%).
Summing up, the future of NBFC-IFCs is promising despite concerns.
Manushree Saggar is Vice President & Sector Head and Deep Singh is Vice President, ICRA