India Ratings and Research (Ind-Ra) opines non-bank finance companies (NBFCs) are much better placed to handle the possible impact of the ongoing third covid wave. While the third wave is more rapidly spreading, the need for hospitalisation and casualty has been lower while the healthcare infrastructure seems to be prepared to cope with the rising numbers. The probability of a severe nationwide lockdown, at the moment, seems low with restrictions being imposed at the regional level. In absence of any restrictions, the impact on the cash flow of NBFC borrowers may remain modest.
Furthermore, a large proportion of the weaker borrowers of NBFCs would have been filtered out in the first two waves.
NBFCs have witnessed a nationwide lockdown for three weeks during the first wave and regional lockdowns during the second wave (1QFY22). Non-banks navigated the periods of business disruptions during the first two covid waves by tweaking processes, digitising certain operations, restricting operating hours and physical movement, slowing down disbursements, focusing on collections and vaccinating their staff. NBFCs also reached out to their customers and offered relief measures with the help of the moratorium scheme applicable from March to August 2020 and restructuring packages announced by the Reserve Bank of India in August 2020 and May 2021. The Emergency Credit Line Guarantee Scheme (ECLGS) funds that were disbursed to select few customers by NBFCs to the extent of INR300 billion offered immediate liquidity support to micro, small and medium enterprise borrowers without any immediate repayment pressure since these funds offered a moratorium of one to two years.
Improving Collection Efficiency: The collection efficiency data point to a recovery in the overall operating environment. The commercial vehicle segment, where collection efficiencies fell 60%-70% in 1QFY22, has recovered and is close to pre-covid level. On the microfinance loans front, collection efficiency had declined 20%-25% during the second wave and has significantly recovered since then. While delinquencies in 1-90 dpd continue to be in the range of 5%-15%, the transition to the subsequent buckets has slowed down materially. All these data indicate the third wave impact may not be disproportionate, given that it is not so much of a health crisis as in the second wave. Also, the bounce back shows resilience of the segments.
Vehicular movement reflected by e-way bill generation is moving towards normalcy, while the commercial vehicle retail sales trend is improving. Domestic passenger vehicle sales dropped on both monthly and yearly basis, partly due to the semiconductor shortage; however, demand for the same is reflected by the low dealership inventory levels of 10-15 days. The combined index of eight core industries during April – November 2021 grew 13.7% yoy, reflecting some revival in the overall economy.
Strong Balance Sheet Buffers: Large NBFCs have strong balance sheet buffers to absorb the impact of possible disruptions in the operating environment. Entities have sufficient liquidity to meet at least three months of debt repayments, as also easy access to capital market and banks for mobilising funds. An increased focus on collections and a reduced disbursement rate have helped NBFCs to conserve liquidity. They have also protected their balance sheet by making higher provisions on non-performing advances as well as standard assets to shield the impact of incremental credit cost. Revised NPA guidelines can increase headline numbers; however, the credit cost impact could be minimal.
Minimal Slippages due to Third Covid Wave: The bounce rates have moderated; however, there could be some inching up due to the third wave led business disruptions. Slippages from the restructured book (3.2% of the portfolio), which would come out of the relief package / easy repayment terms in 4QFY22 and FY23, could put some pressure on the headline numbers. However, this book is already provided for to the extent of 10%-20% and hence incremental provisioning would be moderate. There could also be slippages from the portfolio supported by ECLGS funding post the moratorium period. Most funding was provided under ECLGS version 1.0 and 2.0 and NBFCs have been very selective in disbursing these loans. Also, there was not much demand for these loans post opening up of the economy.
Healthy Capitalisation: Overall NBFCs have sound capital buffers due to the latest round of equity raising and reduced balance sheet growth. Lower rated NBFCs (rated A and below) have high capital buffers to absorb asset-side stress. Ind-Ra opines that NBFCs would be mindful of their growth aspirations, considering the operating environment and consumption of capital buffers.