The asset quality of non-banking financial companies (NBFCs) and housing finance companies (HFCs) weakened sharply in the first quarter of financial year 2021-22 due to localised lockdowns imposed by various states on account of the second wave of COVID-19 infections, ratings agency ICRA said on Monday.
However, the asset quality of these non-bank entities is set to improve in the subsequent quarters of FY22 as collection picks up, it said.
The lockdowns impacted the collection process of non-bank entities, resulting in the sharpest jump in their overdues in the recent past as borrower level liquidity got stretched as there was no loan moratorium unlike in the last fiscal, ICRA said in a statement.
"About 45 per cent of the NBFC loans had availed of the moratorium as of August 2020 and largely from the individual and the MSME loan segments. It also impacted the fragile recovery in the borrower cash flows, which were affected by the pandemic in the last fiscal. The marginal borrowers, therefore, slipped into the NPA/overdue category during Q1 FY2022," the statement said.
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ICRA expects the headline asset quality numbers to moderate as the trend in the collection efficiencies continues to remain encouraging and sees a 50-100 basis points increase in the overdues in FY2022 if there are no further COVID-19 induced lockdowns.
"While asset quality pressures persist, the increase in the overall provisions, which currently is 1.7x the pre-Covid levels (December-19), provides some comfort. This would give the entities adequate leeway to technically write-off and clean up their balance sheets," Manushree Saggar, Vice President and Sector Head of Financial Sector Ratings at ICRA, said.
While write-offs remained high in Q1 FY2022, they were lower than the levels witnessed in Q3 and Q4 of FY2021. However, given the uncertainties in the operating environment, write-offs are likely to remain high in FY2022 and similar to the last fiscal at about 2.4 per cent of assets under management (AUM) for NBFCs and 0.3 per cent for HFCs, Saggar added.
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The rating agency said disbursements for non-banking entities declined by about 55 per cent on a sequential basis during the first quarter of the financial year.
"While ICRA's interaction with various entities suggests that disbursements revived quite sharply in July 2021 on the back of the pent-up demand, however, sustainability of the same would depend on the broader macro-economic indicators. Given this subdued disbursements and portfolio rundown in the absence of any moratorium like in Q1 FY2021, the AUM for NBFC-segment shrunk in Q1 FY2022, while the HFC AUM remained flat," the statement said.
ICRA expects overall disbursements for FY2022 to be higher by about 6-8 per cent on a year-on-year (Y-o-Y) basis on the back of two consecutive years of Y-o-Y contraction. From an AUM perspective, the sector is expected to grow at 8-10 per cent in FY2022. The growth would be driven by the improvement in demand from all key target segments vis-a-vis FY2021, on the back of a low base, Saagar said.
ICRA expects the earnings performance of these entities to improve in the subsequent quarters of FY22 as credit costs would moderate with reduction in overdues from June 2021 levels if there are no further lockdowns.
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