Ears to the ground – Collection efficiency improving
* Improving trends in collection efficiency; borrowers fear holds the key: Our discussions with various collection agencies and ground-level staff indicate that overall collection efficiency for most lenders is improving since Aug’20 and is expected to see further improvement in Sept’20 post moratorium completion. Average collection efficiency across products for Aug’20 has crossed ~65% for most lenders, while including static pool (dues including moratorium period) it has improved to 50-55%. Although overall bounce rates are still elevated (nearly 20-25%), the availability of field staff for collections (after gradual unlock phases) has resulted in consistent improvement in overall collection and recoveries. Educating customers about moratorium not being a waiver and the importance of credit score have also played an important role in such an improvement.
* Personal vehicle, 2W and credit card recoveries remain superior to LAP and unsecured SME loans, which are most vulnerable: Among products, collections for consumer durable products, LAP and unsecured SME/business loans are the most impacted, while credit cards are faring relatively better as borrowers in general are preferring to hold liquidity during these turbulent times. Passenger vehicle (including cab aggregators) and small-size MHCV operators are also the most impacted during the current pandemic. In addition, as expected, recoveries remain relatively challenging in metros/Tier 1 cities compared with rural areas.
* Restructuring would be available only for situational defaulters against wilful defaulters; Corporate borrowers preferred over retail borrowers: Most lenders are reluctant to offer the RBI’s restructuring window to borrowers in general and prefer to remain selective. Though clarity is likely to emerge by month-end, only situational defaulters are expected to gain this restructuring advantage over wilful defaulters. In addition, most management prefers to offer this restructuring window to corporate borrowers instead of retail borrowers to ensure repayment discipline.
* Some green shoots on credit demand side likely with rise in pent-up demand; unsecured loans and balance transfer for mortgages to gain momentum: Our discussions with regional DSAs suggest that there is pent-up demand for working capital loan visible as of now, which should trigger incremental credit growth after lock downs. Demand for unsecured personal and business loans is also expected to remain higher initially; however, lenders will prefer to remain cautious. Further, with recent dip in lending rates for most of banks, a trend of balance transfer would prevail, especially in mortgages, and this will be negative for smaller and regional NBFCs.
* Liquidity comfortable; adequacy levels encouraging: Our discussions with listed and smaller unlisted NBFCs and co-operative societies across states indicate that the liquidity situation for most such lenders is comfortable currently. According to our channel checks, most private banks and a few PSU banks have extended RBI term-loan moratorium to them. Further, existing assets assigned/securitized continue to get moratorium irrespective of banks involved (private and PSUs including SBI). Also, recent capital raise by most NBFCs (QIP and rights issue) has improved overall capital adequacy and would suffice for any ad hock provisioning requirement.
* No short-term triggers; recovery to be gradual; prefer to stay cautious: We have been highlighting our cautious view on the sector considering demand recovery would be a gradual and time-consuming process. We choose to maintain our cautious stance until we see an improvement in macros and remain watchful of any developments. HDFC Ltd. (Buy, TP Rs2000) remains our top pick in the sector, along with CIFC (Buy, TP Rs230) and SHTF (Buy, TP Rs730).
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