FORESIGHTS, MAY

In recent times, the Reserve Bank of India (RBI) has adopted a decidedly hawkish stance in its oversight of the financial sector. A prime example of this is the RBI’s decision to increase provisioning requirements for project financing. This move is part of a broader trend of measures against banks and non-banking financial companies (NBFCs) that have been found deficient in risk management and technology-related issues.

While increasing provisioning is undoubtedly a prudent step, aiming to buffer the financial system against potential risks, it's not without its consequences. For the infrastructure sector—considered a key pillar of India's recent economic expansion—this regulatory tightening could translate into a higher cost of borrowing. This, in turn, could dampen the pace of new projects and slow the infrastructure development that is crucial for sustained economic growth. The decision also underscores the RBI’s ongoing concerns about certain segments of the market, particularly those with historical asset quality issues. It's a clear signal that the central bank is prioritising financial health and stability over short-term growth.

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While the Indian economy is comfortably placed with healthy growth and moderating inflation, there is no denying that there are concerns about weak consumption and private investment growth. The new government that is formed post-general elections will have the responsibility to steer the economy on a sustained high growth trajectory amid the lurking domestic and global challenges.

The biggest challenge that the new government should take up is to ensure more inclusive growth. Post-pandemic, while the higher income category has shown a strong bounce back in consumption, the lower income category remains wary of spending. In the given backdrop, it is important to ensure that all sections of society benefit from India’s growth trajectory. The creation of ample job opportunities will help bridge India’s income disparity while ensuring that the country truly benefits from the availability of a large working-age population.

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What is Keeping the Core Inflation Low?

The decline in core inflation is attributable to lower goods and services inflation. While services disinflation initiated the trend in October 2022, moderation in core goods began a bit later in March 2023 (Figure 1). Below are the key trends within the core inflation:

A Broad-based Moderation in Services Inflation resulted in lower core inflation

The moderation in the services inflation has

been broad based in transport services and communication services. In case of transport services, average inflation in FY24 fell by 475 bps from 7.3% in FY23 to 2.5% in FY24 while in the case of communication services, average inflation moderated by 425 bps falling from 5.5% in FY23 to 1.2% in FY24.

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However, despite the uptick, the pace of construction fared lower than 37 km per day reported in FY21 due to execution woes and increasing competitive landscape. Furthermore, increasing project complexities, rising participation of moderate creditworthy sponsors and significant delay in the receipt of appointed date post award of the project are expected to pull down the execution pace by 7-10% during FY25 to around 31 Km/day. CareEdge Ratings expects National Highways Construction to slow down from 12,350 Km in FY24 to 11,100-11,500 Km in FY25.

BOT-HAM remained the preferred mode of award constituting around 55% of the total projects awarded during FY21-FY24. CareEdge Ratings has observed significant delays in the execution of such HAM projects. Of the overall sample of HAM projects awarded after March 2020 amounting to Rs.1.50 lakh crore, approximately one-third of the projects with an aggregate Bid Project Cost (BPC) value of Rs. 50,000 crore are facing delays ranging from 4-6 months beyond the grace period of three months. These projects have applied or received an extension of time (EOT) of a similar or longer period. Notably, another significant portion of NH-HAM projects with an aggregate BPC value of ~Rs.40,000 crore as of April 1, 2024 are still awaiting issuance of Appointed Date for more than a year as compared to Rs.14,500 crore as of June 30, 2023. Of the total awards of ~12,300 Km by National Highways Authority of India (NHAI) in FY22 and FY23, 20% continue to await appointed date for more than one year.

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The advances grew by 15.0% in FY23 and continued to grow at 19.9% (y-o-y) during 9MFY24. The growth was largely driven by personal loans followed by the services sector. Personal loans grew at the highest CAGR of 27.7% from March 2022 to December 2023 while the services sector grew at a CAGR of 23.7% for the same period with NBFC and trade being the major contributors. Following the RBI guidelines requiring higher risk weights on unsecured personal loans and higher-rated NBFCs, the growth rate in personal loans declined in Q3FY24 after growing sequentially by 13.3% in Q2FY24 to 7.2% in Q3FY24; however, it continues to grow at a decent pace.

Private sector banks (PVB) continued to outpace public sector banks (PSBs) in overall acceleration in credit growth. PVBs share in total credit has increased to 42.0% in Q3FY24 from 36.3% in March 2020 including the HDFC merger. Without the merger, the share of PVBs would be 37.5% as of December 2023. Addi- tionally, the credit-deposit ratio is high for PVBs i.e. in the range of 88% to 97% (including the HDFC merger) as compared to 76% to 81% for PSBs.

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“We predicted the market in FY24 to cross ₹2 lakh crore to achieve an all-time high market volume. The resilient performance of securitisation transactions and the preference of banks to grow retail assets / meet PSL lending norms ensured the market crossed ₹2 lakh crore. We expect a higher level of activity in the RMBS space in this financial year. CareEdge Ratings expects the market momentum to continue in FY25.”, said Vineet Jain, Senior Director at CareEdge Ratings.

The merger of HDFC entities has adversely impacted the DA volume which constituted 51% (around 61% in FY23) of the overall volume for FY24. PTC transactions accounted for the remaining 49% (around 39% in FY23).

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Accelerated store additions by branded jewellers amid changing consumer preferences After a brief hiatus in FY2021 and FY2022, most jewellery retailers recommenced their store addition plans in FY2023 and continued it in FY2024 with an addition of around 260 stores by the top six listed jewellery retailers. CareEdge Ratings expects the organised jewellers to continue expanding their retail network by more than 20% YoY in FY25 to capitalise on the industry-wide tailwinds amidst shifting consumer preferences towards branded jewellery retailers. The revenue growth for branded jewellers is expected to be supported by contribution from new stores and sustained rise in gold prices. However, their profitability is likely to be impacted by front-loaded operating expenses on new stores, higher advertising expenditure to drive store footfalls and increased discounting to counter rising competition from other jewellers.

The credit metrics of CareEdge Ratings’ sample of 8 entities are expected to remain comfort- able in FY2025 with projected median gearing below 1.0 times and median interest cover sustaining above 4.0 times. The entities are expected to open ~70% of their new stores under the franchisee model (wherein the capex and inventory are funded by the franchisee partner), thereby keeping the incremental capital requirements in check, translating into comfortable credit metrics.

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