‘Asset quality pressure to persist for NBFCs’

‘Collection efficiency hit, rising now’

The pressure on quality of assets for non-banking financial companies (NBFCs) would persist in the near term and the risk to this sector would remain elevated due to the impact of the COVID-19 second wave, ICRA said in a report.

Stating that large Housing Finance Companies (HFCs) had witnessed relatively limited impact on their collection efficiency (CE) during the second wave, the ratings agency said other NBFCs with exposure to several segments such as vehicle finance, business loans and microfinance saw their CEs decline by about 20-25% in May 2021 vis-a-vis the average Q4 FY2021, when the lockdown imposed by various states was more stringent and widespread.

The CE improved marginally (rising 3-5%) in June compared with May, with States steadily relaxing restrictions, it added.

“We note that the headline asset quality numbers for June 2021 would be significantly elevated vis a vis March 2021, but the same is expected to subside over a couple of quarters if the CEs continue to trend upwards in the subsequent months,” said A.M. Karthik, vice president, Financial Sector Ratings, ICRA Ltd.

Overall 90+dpd [days past due] of the ICRA sample, in March 2021 increased by only 30-40 basis points (bps) over March 2020 levels, as collections had improved steadily and reached pre-Covid levels by March this year, he said.

ICRA said the restructured book for NBFCs (excluding HFCs) is expected to move up to 4.1-4.3% by March 2022 while that for HFCs is likely to go up to 2.0-2.2%. The overall sectoral restructured book is therefore expected to double to 3.1-3.3% by March 2022 vis a vis 1.6% in March 2021.

“Notwithstanding the near-term pressures, the net increase (adjusting for write-offs) in the 90+dpd in the current fiscal is expected to be about 50-100 bps,” Mr. Karthik added.

With credit costs expected to remain elevated in FY2022, earnings are likely to remain subdued, the agency said. Thus, pre-tax return on the managed assets (RoMA) is estimated to remain stable at about 2.2-2.3% in FY22, it added.

“The credit cost could moderate in the next fiscal, provided there are no new surges in the infection rates,” Mr. Karthik said.

ICRA said its outlook on the sector remained ‘negative’.

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