Asset quality issues to hit NBFC profitability in FY21 and beyond, says Ind-Ra

Although the liquidity and funding environment have improved for better rated non banking financial companies (NBFCs) post July, asset quality issues will impact their overall profitability in FY21 and beyond, India Ratings and Research (Ind-Ra) said on Thursday. NBFCs have increased their focus on collections and have tightened underwriting standards and so, portfolio growth will take a back seat.

Ind-Ra has maintained a negative outlook on the NBFC and housing finance company (HFC) sectors for H2FY21, amid Covid-19 related business disruptions.

“Considering the unabated spread of the virus at pan-India level, Ind-Ra opines that time required for NBFC operations to return to normalcy could be prolonged,” the agency said in its mid-year outlook for the sector.

Growth in assets under management would be flattish for NBFCs, as against an earlier estimate of 8-10% year-on-year (y-o-y) and in lower single digits for HFCs in FY21. Capitalisation remains reasonable, given the muted growth outlook, to absorb moderate asset quality stress.

As the loan moratorium was in place during April to August 2020, the Indian securitisation market witnessed transactions getting concluded selectively. Ind-Ra 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, the agency expects pent-up demand from investors for assets, and supply from originators for liquidity generation, may drive securitisation volumes.

Within asset classes, commercial vehicles (CV) demand has dampened due to restricted movement, drying up of freight due to economic inactivity and lower freight rates, caused by Covid.

Under-utilisation of capacity, uncertainty in drivers’ availability, higher vehicle cost after 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 H2FY21.

The book under moratorium has progressively declined for all segments, and collection efficiency has improved between April and August.
However, collection levels are far lower than pre-pandemic levels.

The Reserve Bank of India’s (RBI) scheme for restructuring of stressed accounts could offer some relief on credit costs. At the same time, slippages could be higher for certain segments, resulting in higher credit costs.

“Ind-Ra opines the proportion of restructured book of the total assets under management could be in high single digits,” the agency said, adding that the segments which could witness higher asset quality pressure are CV, real estate loans and big ticket loans to SMEs.