Sharp drop in NACH bounce rate not fully reflective of borrowers' credit health: Ind-Ra

20 Jan 2022 , 01:36 PM

The bounce rate data released by National Payments Corporation of India shows a continuous improvement in the collections since July 2021. So much so that the current bounce rates are marginally better than those in the pre-covid period. While the economic normalisation and improving cash flow have helped the decline in the bounce rate, it has also benefited from the dispensation/support received by some portion of non-banks’ borrowers in form of restructuring and Emergency Credit Line Guarantee Scheme (ECLGS) benefits, says India Ratings and Research (Ind-Ra). The top 11 non-banking finance companies’ (NBFCs) restructured portfolio stood at around 3% of the total asset under management (till 30 September 2021) and additional 5% of the portfolio is likely to have benefited from ECLGS. ECLGS funds helped borrowers to tide over the problem caused by the drying up of liquidity.

 
The COVID-19 pandemic caused disruptions in the business cash flows, resulting in heightened delinquencies for banks and NBFCs. Customers with vulnerable credit profile saw a disproportionate impact on their businesses and consequently NBFCs servicing them saw a spike in the delinquencies.

Asset Quality Movement of Top 11 NBFCs from FY20 to 2QFY22

 
Almost all lenders have reported an improvement in the collection efficiency with many reporting levels matching or improving pre-pandemic. However, the methodology of reporting collection efficiency across lenders remains inconsistent with differences in the way overdue collections and overdue demand are used for calculations. The differences on this account could add up to 10% among NBFCs.

Ind-Ra opines that segments such as personal loans, business loans, school bus, taxi segment and heavy commercial vehicles are still witnessing lower collection efficiencies i.e. higher bounce rates. These have been restructured at a higher proportion and so the actual pain in these segments does not get reflected in the bounce rate data. Ind-Ra believes that credit cost would be elevated for FY22 and slippages from the restructured book can put pressure on the headline asset quality numbers. Typically, the restructured book is provided in the range of 10%-20%; however, slippages from this book will necessitate 15%-30% of additional provisioning. Thus, the NBFC space will see moderate profitability for FY22, due to higher credit costs and higher operating expenses to meet increased business volumes and the higher efforts being made towards collections.

Having said that, Ind-Ra also believes that in the absence of any serious disruptions and upcycle in the economic activity, NBFCs should report better loan growth and margins. The stronger expansion should help in the strengthening of their profit & loss buffers, thereby providing stronger cushion to absorb any rise in credit costs.