HFCs Growth On Upward Trajectory In Q1 FY2023
The buoyancy seen in the on-book portfolio growth rate in the industry, post the second wave, persisted and the overall growth continued rising in Q1 FY2023. The growth was driven by the healthy demand in the industry and the increasing level of economic activity. Going forward, demand is expected to remain firm and ICRA accordingly retains its estimate of growth of 10-12% in the HFCs’ on-book portfolio in FY2023. The asset quality recovery continued in Q1 FY2023 and the gross non-performing assets (GNPAs) declined by 6 basis points (bps) to 3.1% as on June 30, 2022, from 3.2% as on March 31, 2022, due to increase in the on-book portfolio and recovery in the non-housing segment of some large HFCs. This is against the general trend of an increase in the GNPAs in the first quarter of any fiscal. The industry also continued to witness good recoveries from the restructured book and with growth in the assets under management (AUM), the standard restructured book declined to ~1.3% of AUM as on June 30, 2022, from ~1.7% as on March 31, 2022. The decline in the GNPAs to 3.1% as of June 30, 2022, was in line with ICRA’s estimate of 2.7-3.0% as on March 31, 2023. Though, generally the asset quality indicators deteriorate in the first quarter of a fiscal, this year it was different, as the continuing recovery efforts by HFCs and healthy growth in the on-book portfolio helped the industry. The improvement in GNPAs in Q1 FY2023 was driven by improvement in GNPAs of some large HFCs and it was not broad based. Nevertheless, ICRA expects further improvement in FY2023 and retains its GNPA estimate of 2.7-3.0% by March 31, 2023. The HFCs have been maintaining healthy on-balance sheet liquidity for the last few quarters and have gradually reduced their reliance on short-term funding sources like CP, which has helped improve asset-liability mismatches in the near-term buckets. With the reduced uncertainties and increasing interest rate scenario, HFCs are expected to reduce on-balance sheet liquidity from the current high level, nevertheless, the same is expected to remain comfortable. While the net interest margins (NIMs) may be impacted, due to the rising interest rate scenario, the overall profitability of HFCs is expected to improve to the pre-Covid level with return on assets (RoA) of 2.0-2.2% in FY2023, driven by lower credit cost requirement supported by improving asset quality and high provision cover. Keeping the credit costs under control would, therefore, be critical for incremental profitability.
Tags : HFC growth Sachin Sachdeva Vice President and Sector Head Financial Sector Ratings ICRA GNPA