Assets under management of non-bank financial companies expected to grow 9-11% in FY23: report

Assets under management (AUM) growth for NBFCs and HFCs is expected to be 9-11% in FY23, compared to a 9.5% increase in the last fiscal year, according to a report.

In FY2022, the increase in assets under management of non-bank financial companies (NBFCs) and housing finance companies (HFCs) was largely due to the strong growth seen in the fourth quarter of FY22, ratings agency Icra Ratings said in a note on Wednesday.

While HFCs grew by nearly 10%, the retail NBFC segment grew by 8.5% and the wholesale NBFC segment by approximately 12% in the prior fiscal year.

The strong growth of the NBFC wholesale segment is attributable to the weak base and rising credit of large NBFCs backed by parent companies, which have increased their supply chain, capital market and other exposures to companies, the agency said in the note.

“We continue to hold the FY2023 growth estimate for NBFCs and HFCs (excluding infra-finance entities) at 9-11%,” he added.

Regarding the sector’s funding resources, the agency said non-convertible debenture (NCD) issuances by NBFCs and HFCs in the first quarter of fiscal 2023 hit a multi-quarter low of around 28% lower than the first quarter of fiscal 2022 and 65% lower than the first quarter of fiscal 2021.

Emissions were down approximately 22-28% from the first quarter of fiscal 2020 and the first quarter of fiscal 2019.

The hike in repo rates by the Reserve Bank of India (RBI) in May and June 2022, along with high inflation rates, has affected investor appetite.

While overall emissions were impacted by the sharp decline in participation by public sector enterprises (PSUs) operating in this space, emissions by private entities also declined in the first quarter of fiscal 2023 on a year-over-year basis, says Note.

At the same time, commercial paper (CP) volumes have remained within range for the industry over the past two years. However, overall CP issuance has seen some upside in recent months.

Gradually, given the scenario of rising interest rates and competitive pressures, entities may seek to increase the share of short-term (ST) funding to support margin, the agency said.

Manushree Saggar, Vice President and Sector Head (Financial Sector Ratings) at Icra Ratings, said MNT and CP yields had reached pre-Covid levels, although the spread to the zero rate risk has remained quite low compared to the past. The same goes for the favorable supply and demand environment thanks to limited participation in PSUs and access to bank financing at favorable rates.

“While these factors may change in the future, the expected merger of HDFC Ltd into HDFC Bank would still lead to a benign spread scenario for the sector,” she added.

The agency said that in the future, sales – securitization or direct sale (DA) – could become the main source of funding for the sector, as concerns about asset quality have diminished and growth resumes. observed in the recent past would support the sales downwards.

The sell-down market has also developed in recent years with the improvement in the share of assets in non-priority sectors in overall volumes and the diversification of the investor base.

Retail funding through deposits may also experience a revival as the interest rate for other sources of funding increases as entities attempt to leverage their franchise.

“Overall, we have factored in a 100 basis point increase in weighted average cost for the industry in the current fiscal year. While this would impact margins, a favorable credit/provision cost position compared to last fiscal year would support player profitability,” Saggar said.