The rapid increase in Covid-19 afflictions and intermittent lockdowns will increase asset quality challenges of non-banking financial companies (NBFCs), already grappling with the economic slowdown since last fiscal, Crisil Ratings said on Friday.
According to Crisil, the trend in monthly collection efficiency till August 31, 2020 (unadjusted for moratorium) shows there is still some way to go before reaching pre-pandemic levels. While the recent restructuring scheme afforded by the Reserve Bank of India (RBI) would be a leash on reported non-performing assets (NPAs), underlying challenges continue.
Loan delinquencies of NBFCs could dart up 50-250 basis points (bps) this fiscal, depending on the segment of operation, because of vulnerability in borrower cash flows. This is a base-case estimate without factoring in loan restructuring and the Covid-19 affliction curve, the report of the agency said.
Assets under management (AUM) of NBFCs are also expected to de-grow this fiscal. Managing collections, after the end of moratorium, is crucial.
Moratorium uptake was higher in April and May, while collections were slack with a stringent lockdown in place. Though collections have improved since June as the economy began opening up, the pace of improvement and extent of ultimate credit losses will be the key monitorables going forward.
According to Krishnan Sitaraman, Senior Director, Crisil Ratings : "While there has been an improvement across segments over the past four months, collections in the wholesale, MSME, and unsecured segments are still much lower than before the pandemic. Now that the moratorium has ended, self-employed borrowers are likely to be impacted more because of slow resumption of economic activity and continued local restrictions. On the other hand, the salaried borrower segment will be more resilient despite pay cuts and job losses."
Understandably, each asset class will behave differently based on the underlying borrower profile, linkage to economic activity and local restrictions. For instance, in home loans, the largest NBFC segment, asset quality is expected to be relatively better than in the other segments. Salaried customers make up over two-thirds of the home loans portfolio, and self-employed the balance.
We expect delinquencies in home loans to rise 30-50 bps for salaried professionals and 150 bps for self-employed/ affordable housing segments this fiscal. In vehicle finance, the second large NBFC segment, asset quality will depend on improvement in macroeconomic environment as commercial vehicles constitute bulk of the portfolio, the ratings agency said.
Given the weak economic activity and slow pick-up in freight, collection efficiency has remained well below pre-pandemic levels in vehicle loans. Increase in early delinquencies is expected to be the highest in this asset class.
The MSME and unsecured segments are likely to see the cascading impact of lockdown on the operations of borrowers and lenders, with heightened risks of salary cuts and job losses, and weak economic activity. However, with entities typically adopting aggressive write-off policies, the reported NPAs for unsecured loans may not reflect the true stress in the segment.
As in the past year, the wholesale segment will be in a cleft stick because of the impact on cash flows of borrowers and slowdown in real estate sales. From a recovery perspective, a lot will depend on the timelines and modalities of lifting of lockdowns and return to normalcy in operations of NBFCs.
The restructuring scheme for MSME borrowers and personal loans announced by the RBI may now limit the rise in NPAs in these segments. Nevertheless, NBFCs are expected to be prudent in offering restructuring selectively to deserving accounts and not in a blanket manner.
Ajit Velonie, Director, Crisil Ratings said, "As opposed to reported GNPA, collection efficiency will be a better yardstick to measure asset quality challenges now. Given the trend till August 2020 and the lingering uncertainties, it is imperative that NBFCs create capital buffers for asset-side risks. The good part is we have seen many of them raising capital of late. Those with weak capital buffers may see their credit profiles getting affected."