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Non-banking finance companies, including housing finance companies, are expected to report around 14 per cent year-on-year growth in assets under management in current financial year, India Ratings said in a report.

"GNPA could rise moderately to 5 per cent in FY23 from 4.6 per cent in 1QFY23 for NBFCs and to 3 per cent from 2.7 per cent for HFCs, largely due to the new NPA recognition norms setting in from October 1, 2022; however, credit cost would remain stable due to the adequate provisions built-in," says Jinay Gala, Associate Director, India Ratings.

The ratings agency believes in terms of asset classes, commercial vehicles should see a gradual recovery with the collection efficiency on an improving trend; however, the inflationary pressure on borrowers' income profiles could pose debt servicing challenges, leading to pressure on softer delinquencies.

Also, new vehicle demand could be low due to higher pricing and borrowers preferring used vehicles to maintain adequate operating cash flows. Disbursements could pick-up because of the festive season to a certain extent.

Tractors could see normalcy with monsoon being supportive and farm income levels undeterred by the pandemic and rising minimum support prices. Loan against property (LAP) market would remain subdued due to challenges on growth due to stagnant property prices and borrowers already utilising collateral in hand.

Low-ticket LAP would perform better than high-ticket LAP as the former is linked to essential services; services sector would perform better than manufacturing sector.

India Ratings and Research has changed the outlook to neutral from improving for non-banking finance companies and housing finance companies for 2HFY23. The sector witnessed an improvement in the collection efficiency and disbursements post pandemic.

With the onset of normalcy in lending, the on-balance sheet liquidity would also normalise, negating the impact of rising cost of funds, thereby protecting margins to a certain extent. Also, a lower credit cost for 2HFY23 would aid profitability. Higher inflationary pressure on borrowers and interest rates could deter demand normalisation in the near term; however, the festive season demand could support the baseline credit offtake.

As the economic activity picked up in 1QFY23, the Indian securitisation market witnessed higher volumes of transactions. The front-end supply so far in this year has been driven by a continued higher funding demand and originators locking-in yields ahead of expected interest rate hikes. However, the recent pass through certificates transactions were placed at the wider yields of 50-100bp. Ind-Ra expects securitisation volumes to reach pre-Covid levels subject to stabilised market sentiments.