For NBFCs, bad luck comes in threes

Non-banking finance companies (NBFCs) have been under a dark cloud ever since the IL&FS fiasco cracked open in September 2018. After that, they began to feel the drag of the slowdown, and now they have run into a stillness imposed by COVID-19. Crisil estimates that NBFCs might witness a steep increase in delinquencies in FY21. The ratings company has put out a wide range for rise in delinquencies — anywhere between 50 to 250 basis points—depending on the NBFC’s segment of operation. Krishnan Sitaraman, senior director at Crisil Ratings says, “While there has been an improvement across segments over the past four months, collections in the wholesale, MSME, and unsecured segments are still much lower than before the pandemic.” With the moratorium lifted, self-employed people are likely to be more vulnerable with weak economic activity and ongoing local restrictions. He expects the salaried borrower to be more resilient, despite pay cuts and job losses.

The worst hit NBFCs are likely to be the ones dealing with loans against property, with 6-6.5% of their borrowers crossing 90-plus dpd (days past due) in FY21, compared to 3.5-4% in FY20. That is an increase of 250 basis points. The least increase in delinquencies has been forecast for NBFCs dealing with home loans—1.7-1.9% of their borrowers crossing the 90-plus dpd in FY21, compared to 1.1-1.3% in FY20. That is only an increase of 60 basis points — and among salaried borrowers even lower at 50 basis points. But, collection efficiency will be a better yardstick to measure asset quality of NBFCs now, according to Ajit Velonie, director, Crisil Ratings, as opposed to their reported GNPA. Crisil will be watching closely the collection efficiency post moratorium, equity raising plans to absorb provisioning, and liquidity to meet debt obligations and operating expenditure, before revising its rating.

While Crisil is in wait-and-watch mode, India Ratings (Ind-Ra) has revised its sentiment on NBFCs and HFCs. According to Ind-Ra, though the liquidity and funding environment have improved post July for better-rated NBFCs, the NBFCs are worried about their asset quality so there will greater focus on collection efficiency and stricter standards for extending loans. Therefore, portfolio growth is likely to slacken.  Earlier Ind-Ra had expected NBFCs to grow at 8-10% year-on-year for FY21 and HFCs at lower single digits, but now the rating agency has said that it has a negative outlook for both for 2HFY21.