Ratings agency ICRA says due to the ongoing corona virus (COVID19) outbreak it seeks negative outlook for financial services including non-banking finance companies and housing finance companies (non-banks), brokerages and insurance companies.
In a research note, the ratings agency says, "While ICRA notes that most of the key target asset segments faced subdued demand related headwinds and some non-banks also faced funding constraints that impacted growth in the current fiscal, the COVID-19 related slowdown in economic activity would further aggravate the already subdued demand environment. This would impact their business levels in March 2020, which typically witnesses robust levels of disbursements, leading to slower-than-envisaged growth in the current fiscal."
"Further, since a large section of the people are facing movement and business-related restrictions and are postponing non-discretionary spending, this has led to a fall in the economic activity. The cash flow and liquidity position of many borrowers (individuals, small businesses and corporates) are likely to get affected, impacting their debt servicing capabilities. The impact would be more prominent on self-employed borrowers, the daily wage workforce, and small businesses (non-essentials)," it added.
According to ICRA, non-banks' overdues and credit losses could go up about 50-100% over the next few quarters and could move up further if the impact of COVID-19 on the business activities persists for a longer-than expected period.
The overall non-bank advances are estimated at about Rs35 trillion, as of September 2019, with exposures ranging from retail individual borrowers to large corporates.
Non-banks, which are already facing funding constraints and an expected increase in delinquencies, are likely to focus more on collections at least in the near term. Therefore, ICRA says, lack of supplementary credit funding could have a significant negative impact on these borrowers as their cash flow mismatches would compound with the passage of time.
"If the COVID-19-related movement and business restrictions continue for a longer period of two-three months vis-à-vis the current expectation of a few weeks, the impact would be more adverse," it added.
The ratings agency says, its outlook for non-banks is, therefore, negative at present, as the business growth and all key performance parameters like asset quality, solvency, liquidity and earnings are expected to weaken over the next one-two quarters and recovery in the latter part of the next fiscal would depend on the overall economic turnaround. However, it says, during this period, the capitalisation profile is expected to remain adequate from a regulatory and solvency perspective, notwithstanding the weakening.
Similarly, ICRA has a negative outlook for the brokerage industry. Over the next three to six months, the ratings agency says it expects brokerage companies to report a moderation in revenue and profitability across businesses. The outlook over a longer period would depend on the extent of the outbreak, consequent impact on the economy, the expectations of turn-around coupled with policy measures as undertaken by the government and investor sentiment.
"With markets expected to remain volatile over the near-term, brokerage entities can witness intermittent increase in funding requirement for core operations for placing margin at the exchange. Companies having strong balance sheet with sizeable own assets and adequate funding lines are expected to fare relatively better," it added.
According to the ratings agency, it sees negative outlook for the insurance sector as well owing to the impact of COVID19. ICRA expects the COVID-19 event hampering business volumes of insurers in the last few weeks of March, and first few weeks of April.
ICRA sees impact of claims and solvency on general insurers during the corona virus outbreak. It says, "The impact on claims will be larger on the entities having a higher share of health portfolio, both private and group health portfolio. Companies with a larger share of group health portfolio, are expected to have higher hospitalisation expenses if the total cases increase by a magnitude of 500 times of current infection rate. If the claims ratio for the health segment would increase by about 30-40 percentage points in the event to a net loss ratio of 130-140% (net loss ratio at 97% as of FY2019), the total increase in claims could be about Rs60-80 billion higher compared with March 2019 in the health segment."
Total gross premium underwritten for the health segment was Rs371.85 billion as of first nine months (9M) of FY2020, and Rs454.89 billion as of FY2019. The net claims paid in the segment as of FY2019 was around Rs280.00 billion.
In addition to the higher claims impact, insurance companies are also impacted by the mark to market (MTM) losses on its equity investment portfolio, and may need to reflect in the solvency parameters in case the MTM is negative, the ratings agency says.
"Equity investments of New India Assurance, United India Insurance, National Insurance Co and Oriental Insurance are predominantly in the public sector entities (about Rs497.51 billion as of first half of (H1) of FY2020). These investments had a cumulative fair value gain of around Rs294.23 billion. In the event of a 40% correction in the equity market, these four entities would be having a cumulative MTM loss on solvency of about Rs180.00 billion. The impact of mark to market on equity investments is much lower on the private sector as the total equity portfolio is about Rs53.47 billion with a fair value gain of Rs710 million. In the event of a 40% correction in the equity market, the net MTM loss would be Rs31.80 billion," ICRA says.
According to the ratings agency, impact on COVID19 on the business of life insurance companies would be relatively higher compared to general insurance companies as tax saving insurance products are usually sold in the last two months of the financial year. The total new business premium (NBP) underwritten for first 11 months (11M) FY2020 was Rs2.33 trillion compared with Rs2.14 trillion in FY2019. Based on past trends, the total NBP collected during March ranges between 17-20% of total NBP for the year.
As of 23 March 2020, mortality rate for COVID19 after infection was 4.3%, and in the event if India reaches a world average infection rate of 100 people per 1 million population, this would result in a mortality rate which would not increase the death claims by a large margin. However, ICRA says for the savings product there could be a larger impact of surrender claims especially for ULIPS, where investors will see large erosion in their funds, because of the equity market declines. ICRA does note the relatively stronger build-up of the reserves for life insurance industry where total policy holder funds was Rs38 trillion as of first quarter (Q1) of FY2020, against which total claims paid in a three-year period was Rs8.3 trillion.
"The impact on higher claims, predominantly health portfolio of general insurance companies, and a marked to market losses on the equity portfolio will have a dual shock on the solvency ratios for the industry. The public sector general insurance companies will have a higher impact on their capitalization, as they are using a part of the fair value gain on the equity portfolio for solvency requirements," the ratings agency concluded.