While maintaining its negative outlook on non-banking finance company (NBFCs) including retail and wholesale and housing finance company (HFC) sectors for the second half of FY20-21 (H2FY20-21), amid COVID-19 related business disruptions, India Ratings and Ratings (Ind-Ra) feels that rhe time required for NBFC operations to return to normalcy could be prolonged.
In a report, the ratings agency says, "Although the liquidity and funding environment has improved for better rated entities post July, there would be asset quality issues impacting overall profitability in FY21 and beyond. Thus, NBFCs have increased their focus on collections and have tightened underwriting standards; portfolio growth would take a back seat."
"Growth in assets under management would be flattish for NBFCs (earlier estimate of 8%-10% year-on-year-yoy) and in lower single digits for housing finance companies in FY21. Capitalisation remains reasonable, given the muted growth outlook, to absorb moderate asset quality stress. As the debt moratorium was in effect during April to August 2020, the Indian securitisation market witnessed transactions getting concluded selectively," Ind-Ra added.
The ratings agency expects the market to open up for a significant number of transactions, once pool delinquency data starts flowing in and stabilises, thereby improving investor confidence. On the other hand, it sees pent-up demand from investors for assets, and supply from originators for liquidity generation, driving securitisation volumes.
According to Ind-Ra, the book under moratorium has progressively declined for all segments, and collection efficiency has improved from April to August 2020. However, it says, collection levels are far lower than pre-COVID levels.
The Reserve Bank of India (RBI) has allowed lenders to restructure their book, which was not more than 30 days past due as on 29 February 2020. "The credit cost that has to be provided on the restructured book is higher of 10% or extant provisioning held on those assets. To that extent, there could be some relief on credit costs; however, slippages could be higher for certain segments, resulting into higher credit costs," it added.
Ind-Ra opines the proportion of restructured book of the total assets under management (AUM) could be in high single digits. It says, some of the segments, which can witness higher asset quality pressure, are commercial vehicles (CV), real estate loans and big ticket loans to SMEs.
"Within asset classes, CV demand has dampened due to restricted movement, drying up of freight due to economic inactivity and lower freight rates, caused by COVID-19. Under-utilisation of capacity, uncertainty in drivers’ availability, higher vehicle cost post BS-VI implementation and higher upfront insurance cost have affected the unit economics of the sector. The agency has maintained a negative outlook on CV as an asset class for 2HFY20-21," the ratings agency added.
According to Ind-Ra, micro, small and medium enterprises (MSMEs), which were already facing stress because of demonetisation, goods and service tax (GST) implementation and overall macro-economic slowdown, suffered a subsequent blow due to COVID-19 in 2020. The ratings agency says it expects limited business revival for them and, hence, has maintained business loans on a negative outlook.
The debt servicing capability of tractor loan borrowers has improved because of three good consecutive harvests, favourable monsoons and increased rural expenditure outlay budgeted by the government. Hence, Ind-Ra says it has revised its outlook for tractor loans to stable for 2HFY20-21 from negative.
Collections for the microfinance sector, which had plummeted to near zero levels in April 2020, have recovered substantially, the ratings agency says. However, rising rural consumer price inflation and per capita indebtedness of borrowers could worsen the debt servicing capabilities of borrowers; and thus, has maintained a negative outlook for 2HFY21 on microfinance loans, it added.
While Ind-Ra has a negative outlook on most of the asset classes, it has maintained a stable outlook on securitisation transactions for 2HFY21 backed by home loans, vehicle loans, secured business loan (loans against property) pools, given the seasoning and credit enhancement build-up in these transactions.
On the other hand, the ratings agency has revised its outlook to negative from stable for the securitisation transactions backed by microfinance loans, unsecured business loans and construction equipment loans because of the uncertainty around slippages post-moratorium.
The regulator addressed sectoral liquidity challenges through targeted long-term repo operations (1 & 2), partial credit guarantee and emergency credit line guarantee schemes; however, the effectiveness of these schemes has been mixed.
Against this backdrop, Ind-Ra says, NBFCs’ on-balance sheet liquidity remains paramount to service their debt obligations. It says it has been closely monitoring the liquidity situation of NBFCs on a monthly basis and has opined that on-balance sheet liquidity (free cash and liquid investments) and unutilised funding lines have been adequate to cover at least three months of debt repayments on a rolling basis, without relying on collections and assuming nil disbursements.
"The funding environment has improved from what it was in April and May 2020; however, mutual funds are still exercising caution in funding NBFCs. Public sector banks have lent money to NBFCs under the targeted long- term repo operations and partial credit guarantee schemes (18 months money)," the ratings agency says.
Ind-Ra opines that the funding environment would remain volatile during FY20-21, and further disruption in the operating environment can make access to funds challenging for low-rated NBFCs.