The tepidness in H1FY2020 has been led by de-growth in banking sector credit to infrastructure segment, though infrastructure finance non-bank companies (IFCs) continued to grow at a modest pace (17% yoy and 12% sequential).
The trajectory of total infrastructure credit in India (banks and infrastructure finance non-bank companies) has flattened in H1FY2020, as per a recent report by ICRA. While the infrastructure credit witnessed a 19% growth in FY2019 to Rs. 21.1 lakh crore, it increased marginally to Rs. 21.2 lakh crore in H1FY2020.
Manushree Saggar, Vice President and Head – Financial Sector Ratings, ICRA, “Majority of the infrastructure credit growth in FY2019 was also back end. Hence, a pickup in H2FY2020 cannot be ruled out, though the pressure on the fiscal position may limit the government’s push towards expenditure on infrastructure and hence constrain a major reversal in trend. Overall, the growth in the total infrastructure credit in FY2020 is likely to remain lower than last year.”
The tepidness in H1FY2020 has been led by de-growth in banking sector credit to infrastructure segment, though infrastructure finance non-bank companies (IFCs) continued to grow at a modest pace (17% Y-o-Y and 12% sequential). The share of IFCs in total Infrastructure credit increased to 50% as of September 2019 from about 38% four years ago.
The decline in the share of banks during past few years was largely attributable to the conversion of their exposures to state distribution companies (discoms) into bonds and; the subdued lending amid asset quality issues and capital constraints. The asset quality of IFCs also deteriorated during FY2016-FY2018 on the back of severe stress in the thermal power sector amidst prolonged structural issues and asset quality review undertaken by banks. Nevertheless, the pace of incremental slippages has slowed during the past 18 months and the asset quality trend line suggests that pressures are receding. While the Stage 3 percentage has eased to 6.5% as on September 2019 from 7.5% as on March 2018, the Stage 2 percentage was also lower at 2.7% as on March 2019 compared to 5.3% a year ago.
ICRA notes that the progress on stressed thermal asset resolution is slow, despite the various measures undertaken by the Government and the lenders. Only about 10% of the stressed capacity has achieved resolution, with another 4% resolved, but remaining under stress. Herein, a positive development is that ~20% affected capacity has recently got admitted to NCLT. Overall, about 38% stressed capacity is admitted/referred to NCLT with remaining being under resolution by the lenders.
While the stress related to the thermal power sector has already been recognized by IFCs, any stress build-up in near to medium term from spillover due to headwinds faced by renewable energy sector remains a concern. Aggregate exposure of IFCs to the renewable energy sector was about Rs90,000cr (~9% of loan book) in September 2019.
On transition to Ind-AS, IFCs booked additional impairments. As a result, the capitalization levels got adversely impacted, though provision coverage and solvency (Net Stage 3/Net Worth) improved. While the gearing for Public-IFCs stood higher at 8x in September 2019 compared to less than 6x till March 2017, gearing for Private-IFCs has reverted to under 5.5x (supported by equity raise and low growth) after having increased to over 6x on the transition to Ind-AS. However, the provision cover against non-performing advances on an aggregate basis stood increased at 52% in September 2019 from a level of 25% before the transition. The solvency, on an aggregate basis, stands improved at 27% in September 2019, compared to 35% prior to this transition.
The share of bank borrowings in incremental borrowings of IFCs increased in FY2019, after the increased risk aversion towards the NBFC sector by capital market participants. The share of debentures in total borrowings outstanding declined to 66% and 48% in March 2019 for Public-IFCs and Private-IFCs from 80% and 50% respectively in March 2018.
“The cost of funds for IFCs has been impacted by ongoing risk aversion towards NBFCs. While some of the public sector IFCs have been less impacted, the larger ones in that space have however been impacted by company-specific developments. Overall, IFCs so far haven’t benefitted significantly from the broader softening of systemic interest rates”, Saggar added.
Given the relatively long tenure of assets compared to the average tenure of borrowings, the asset-liability maturity (ALM) profiles of IFCs (except infrastructure debt funds – IDFs) continue to be characterised by sizeable cumulative negative mismatches in the near-term buckets. On an aggregate basis, the cumulative negative gap in the up to one-year buckets for IFCs was ~ 5% of total assets in March 2019. Thus, the liquidity profile of these entities remains critically dependent upon refinancing and/or undrawn bank lines and support from the parent, if needed.
While the credit costs have eased during past eighteen months, the profitability of public sector IFCs remains lower (RoA< 1.8% for FY2019 and H1FY2020) than the historical average (five-year average ROA of 2.1% up to FY2018), given the sizeable non-income generating stressed assets. However, leverage kicker has increased over the past five years with a considerable increase in gearing for Public-IFCs. As a result, the reported return on equity metric has reverted to 15%-16% range after having dipped to 10%-11% range in FY2017 and FY2018, though with relatively higher risk as reflected by higher financial leverage. As far as private sector IFCs are concerned, the profitability remains considerably lower with sub-par ROE of 4.8% in H1FY2020 and five-year average ROE of 7.2% (for the period FY2016 to H1FY2020). Given the intense competition from Public-IFCs, IDFs and banks, ICRA expects profitability of Private-IFCs (excluding IDFs) to remain lower than its public-sector peers and IDFs until these entities can ramp up and sustain non-interest income levels.
“Overall, recoveries from stressed assets remain critical for sustained improvement in profitability of IFCs. In this regard, progress on the resolution of stressed assets and developments in the renewable energy sector remains key monitorable.” Saggar concluded.