Improving Economy will help NBFC asset quality: Fitch

Large NBFCs’ funding and liquidity profiles are projected to hold steady despite growing funding costs in line with global and domestic policy rates, according to Fitch.

In FY23, Indian non-bank financial businesses (NBFCs) should exhibit improving credit growth and decreasing asset-quality risks, according to a report released on Monday by Fitch Ratings. This should help performance as the economic recovery spreads, while it warned that some markets might still be vulnerable to higher-than-expected inflation.

In June 2022, Fitch changed the outlook from negative to stable for India’s BBB- sovereign rating. This, it claimed, was supported by the nation’s quick economic recovery and waning banking sector deficiencies, which, notwithstanding short-term inflationary headwinds, lessen the dangers to the country’s medium-term growth.

After declining by 6.6 percent in FY21, the gross domestic product (GDP) increased by 8.7 percent in FY22, and Fitch anticipates a strong medium-term growth potential of about 7 percent between FY24 and FY27.

“We do not expect a significant rise in non-performing loans, as an economic recovery should underpin borrowers’ ability to repay. Runaway inflation prompting significantly steeper hikes in policy rates would be a downside risk, with a potential impact on more economically sensitive sectors such as small and medium enterprises (SMEs) and property developers,” it said.

According to the report, even as funding costs rise in accordance with rising policy rates both locally and internationally, the funding and liquidity profiles of large NBFCs are anticipated to remain constant. Depending on their lending category and pricing power, the impact on NBFC net interest margins varies.

“Nonetheless, we expect sector profitability to remain broadly stable overall, in light of stronger anticipated loan volumes and ameliorating credit costs,” it said.