NBFCs to see stability in FY23; capital, margins, provisioning strengths: Report

New Delhi: After years of enduring challenges, the non-bank lenders are finally set to witness a normalisation in FY23, a report said on Friday.

The non-banking finance companies (NBFCs) will start FY23 with sufficient capital buffers, stable margins and sizable on-balance sheet provisioning, while adequate system liquidity would aid funding, the report by India Ratings, a domestic credit rating agency, said.

The agency, which maintained a 'neutral' sector outlook and 'stable' rating outlook for the NBFCs, said its expectations will hold true in the absence of any negative event.

Credit growth for entities it rates will rise to 14 per cent in FY23 from 8 per cent in FY22.

Since the default by IL&FS in 2017, NBFCs have faced difficulties which only aggravated with the outbreak of the pandemic, which affected liquidity.

The agency said an expected increase in systemic interest rates and asset quality issues in some segments due to the lagged impact of pandemic would be a drag on the operating performance of NBFCs in the new fiscal year.

The sector has been facing increased regulatory oversight and push towards convergence with banks through various measures such as scale-based regulation, realignment in asset quality classification and Prompt Corrective Action (PCA) norm, it said.

The secured asset business for NBFCs may see a revival in FY23 with credit growth of 14 per cent, up from 7-8 per cent in FY22.

"The products such as loans against property, housing loans and vehicle finance could witness a higher demand than personal and unsecured business loans which saw a higher demand during the pandemic.

"Growth in the vehicle finance segment could revive depending on the availability of vehicles which are facing component shortage due to the pandemic, along with an increase in borrower confidence towards an economic recovery," it said.

The gold loan segment could see moderate growth in tandem with gold prices along with opening up of other financing avenues for borrowers. Loans against property would see reasonable growth as it would remain the prime source for borrowers to avail loans for working capital or growth capital, it said.

Meanwhile, on impending interest rate hikes, it said NBFCs would have to recaliber their funding avenues. The credit costs are likely to normalise in FY23 even though the headline asset quality numbers can seem to be elevated, it noted.

Segments facing heightened delinquencies for non-banks are the ones where the customer profile could be the most vulnerable, such as two-wheelers, passenger vehicles, unsecured business loans, microfinance and heavy commercial vehicles, it said.