ICRA, a credit rating agency, ICRA improves the outlook for infrastructure finance companies from “stable” to “positive”. This decision comes after the sector witnessed an improvement in investments and asset quality. The agency expects the sector’s enhanced performance to continue in the current fiscal year and the next fiscal year (FY24) due to a better solvency profile, loan book growth, better asset quality, and earnings profile.

ICRA predicts that the loan books of NBFC-IFCs will increase by 10-12% in FY24, supported by the government’s investments in infrastructure to revive economic activity. Despite the growth, there is no need for external capital as internal capital generation is adequate. However, if growth exceeds 12%, an external capital raise may be necessary to maintain leverage.

The infrastructure credit sector, including banks and non-banks, registered an annualized growth of 8.0% in April-December 2022, aided by a sharp pickup in Q3 FY23, bucking the trend of the previous 18 months. NBFC-IFCs grew in line with the system and maintained their market share at around 54% as of December 31, 2022.

The increased demand coincided with the period during which NBFC-IFCs witnessed receding asset quality pressure. Asset quality improved through resolutions/recoveries, sizeable write-offs, and curtailed incremental slippages. Gross non-performing assets (NPAs) declined to 3.4% at the end of March 2022, from the peak of 6.8% at the end of March 31, 2018.

The asset quality indicators moderated further to 2.7% as of December 31, 2022. Additionally, with the ~70% provision cover, the solvency profiles of the issuers are comfortable. The gross stage 3 assets are expected to moderate further by 10-30 basis points (bps) in FY2024, supported by limited slippages and growth in the book.

Manushree Saggar, the Vice President at ICRA, predicts that Non-Banking Financial Companies – Infrastructure Finance Companies (NBFC-IFCs) will experience growth in the range of 10-12% in the fiscal year 2024 due to credit demand generated by the National Infrastructure Pipeline (NIP) set by the Indian government. The sector is expected to report low asset-quality indicators, the lowest in the last six years, for FY23 and FY24 due to limited incremental slippages.

The NBFC-IFC segment is mainly dominated by state-owned entities like Power Finance Corporation (PFC), Rural Electrification Corporation (REC), and India Infrastructure Finance Company Ltd. (IIFCL). A few private sector firms such as Tata Cleantech, Aseem Infrastructure Finance, and Kotak Infrastructure Debt Fund also operate in this sector.

The Indian government’s NIP has created a demand for credit in the infrastructure sector, which will benefit NBFC-IFCs. These companies are expected to grow at a steady rate in the coming years. The asset quality indicators for the sector are expected to remain stable due to limited incremental slippages.