NEW DELHI: Financiers face renewed asset quality and liquidity risks as elevated medical expenses and prevailing Covid-19-led uncertainty is impacting repayment capability.
Initial estimates reveal that non-banking financial companies (NBFCs) saw a 8-10 per cent drop in loan collections in April and an additional 10-15 per cent in May, while nearly 10 per cent of borrowers have been missing their payment schedules during the second wave as against an average default rate of about 2-4 per cent.
According to industry executives, there are lower fresh loan disbursals due to weak demand compounded by risk aversion and some NBFCs are even halting them for unsecured loans.
“The second wave has been more brutal than the first. Other than agri and essential good carriers, all other segments are seeing muted demand. Up to the first 15 days of April we saw normal activity, but since then there has been a significant slowdown… At the end of April we disbursed loans for only 30,700 vehicles. April-May collections have slipped to 70 per cent as against an upward of 90 per cent levels post September,” said Ramesh Iyer, VC & MD, Mahindra Finance.
He added that consumers will continue to find it difficult to service the loans unless activity picks up. "We see things gradually normalising only post August."
Among others, IIFL Finance has halted fresh disbursements for unsecured loans like MSME. The non-bank lender has also tightened disbursements in secured advances such as loans against property -- the most dominant part of its portfolio along with gold loans. In a recent post-earnings analysts’ call, Cholamandalam Investment & Finance executive VP & CFO Arulselvan D also indicated that disbursements have tapered off after posting strong growth in the second half of 2020 largely helped by pent-up festive demand.
Similarly, Shriram Housing Finance has also slowed disbursement. “We have slowed down disbursal and we expect things to start returning back to normalcy only towards the end of this quarter. There are certain sectors like hospitality where we are working with the customers to help them tide this situation,” said Ravi Subramanian, MD & CEO, Shriram Housing Finance.
Even as NBFCs ramped up digital infrastructure, collections have been impacted primarily because many lenders have been forced to stop door-to-door collections after several agents and staff fell sick.
Analysts say that slowdown was evident in segments such as micro-business, vehicle financing as well as personal loans given the vulnerability of the underlying borrower class. Gold loan and home NBFCs, however, seem to be less impacted. “For vehicle finance, we expect the impact to be transitory and is likely to pick up as economic activity improves, akin to last year. MSME and personal loans will see the highest delinquencies but restructuring will provide some respite,” said Krishnan Sitaraman, senior director, Crisil Ratings, adding that the asset quality pressures will only fully pan out in the next few months.
That apart, slower assets under management (AUM) growth, higher credit cost and expected increase in cost of funds to continue exerting pressure on earnings in FY22, which is expected to remain 30 per cent below pre-covid levels and similar to FY21 levels, pointed out sector experts. The Retail-NBFC AUM is estimated to be about Rs.10 lakh crore as of December 2020.
Microfinance institutions (MFIs), which operate at a further smaller level than NBFCs, have been more severely affected as the renewed Covid-19 wave has engulfed the rural areas to boot.
“During the first wave, the rural portfolio was impacted to a lesser extent than the urban portfolio and thus saw a faster recovery as disbursements also recovered especially in the second half of FY22. But this year, recovery is likely to take longer. Lenders are also facing liquidity constraints,” said P Satish, executive director, Sa-Dhan, an industry body comprising 225 microfinance institutions across India.
In a letter to RBI Governor Shaktikanta Das, the Sa-Dhan has sought a special liquidity facility of at least Rs 15,000 crore to be provided by all-India financial institutions such as National Bank for Agriculture and Rural Development (NABARD) and Small Industries Development Bank of India (SIDBI). Of this, at least 40 per cent of the funds should go to MFIs with an asset size of Rs 500 crore, the letter stated.