After a growth moderation in FY21, Non-Bank Finance Companies (NBFCs) are estimated to witness a 9.5 percent jump in their assets under management in FY22, a report said on Thursday. Housing Finance Companies (HFCs) will post a higher growth at 10 percent as home sales go up, India Ratings and Research said, maintaining its ”stable” outlook on both NBFCs and HFCs for FY22.

It estimated the growth to slow down to 4-5 percent for NBFCs and 6.5 percent for HFCs in FY21, driven largely by the impact of the coronavirus pandemic. The system liquidity has improved considerably while the majority of large non-banks have strengthened their capital buffers and the sector has started witnessing disbursement growth, the rating agency said.

The wide differential among NBFCs’ funding costs is likely to push the sector to consolidate, especially in the sectors with a thin margin profile and limited product differentiation, it said, adding the strong regulatory support in FY21 ensured adequate liquidity. From an asset quality perspective, wholesale NBFCs will face challenges in FY22, the agency said and maintained the negative outlook on such entities.

Stress due to the pandemic has moderated due to government schemes which have led to lower softer delinquencies and moderate addition to Gross Non-Performing Assets (GNPAs), it said, pointing out that the overall stressed assets will be higher than a recent RBI estimate of 8 percent. The system-level stressed assets for NBFCs stood at 8 percent on September 30, 2020 as per the RBI report, and between 1.5 to 3 percent of the book would get restructured and an addition of up to 1.5 percent will happen to be the GNPA, taking the overall stressed book to between 9.5-11 percent, it estimated.

Many large NBFCs raised capital before COVID-19 and during the pandemic, resulting in strengthened capital buffers to absorb the above stress along with carrying COVID-related provision. The credit cost will normalise for non-banks in FY22 as the provision hit was taken in FY21 itself. According to the report, competition from banks is likely to intensify especially for secured asset classes such as mortgage and loan against property. Few large non-banks would increasingly focus on customer retention by building strong ecosystems of diverse product suites to address customer needs.

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The NBFCs will focus on segments where they have inherent strengths such as used vehicle financing, two-wheelers, tractors, unsecured lending, gold and affordable housing, as their pricing power is high and such products witness limited competition from banks, it said. On the RBI moves of aligning regulations, the rating agency noted that a discussion paper proposes to bring about scale-based regulations which will further close the regulatory gaps between banks and non-banks, at least for a few large ones. In such an eventuality, if implemented, will increase the cost of compliance and result in readjustment of business strategies.

”Few large multi-product NBFCs could explore migration on to the banking platform, though one of the immediate concerns could be fulfilling cash reserve ratio/ statutory liquidity ratio requirements from day one in the absence of any regulatory dispensation,” it said. Going forward, the NBFCs will also look at taking advantage of the co-lending opportunities presented by regulations and try to earn fee incomes from the stream, it added.