Month: April 2021

The Finance Industry Development Council (FIDC) has urged the Reserve Bank of India to consider extending the one-time restructuring of MSME advances till March 31, 2022, in the wake of the second wave of Covid-19.

The RBI had, in February last year, allowed one-time restructuring of existing MSME advances, classified as ‘standard’ without downgrade in the asset classification, subject to certain additional provisioning and compliance with the conditions prescribed in the said notification. The time limit for implementation of the said restructuring was till December 31, 2020.

Need urgent support

In a letter addressed to the RBI Governor, FIDC said that owing to the second wave of Covid-19, MSMEs and the retail and wholesale trader industry have not been able to revive their economic activities and, therefore, are in urgent need of support from lenders.

“Various surveys and reports are forewarning that the operating environment for banks will most likely remain challenging, as the second wave could dent the sluggish recovery in consumer and corporate confidence, and further suppress banks’ prospects for new business. Considering the challenging environment for MSMEs and lenders, it will be helpful if the RBI extends the said notification till at least March 31, 2022,” said Mahesh Thakkar, Director General, FIDC, in the letter.

The council further was of the opinion that restructuring should also be allowed for MSMEs, including the retail and wholesale trade segment accounts, which were restructured during the first wave, but are standard even after moving out from moratorium. This should further be without any downgrade in asset classification, and should be subject to the lending NBFCs undertaking necessary credit assessment of the future cash flows of the said entity.

Impact on credit offtake

According to Sanjay Chamria, Co-Chairman, FIDC, the above step will bring about a major relief to the already stressed MSME, retail and wholesale trade sectors.

Credit offtake to the MSME sector, which had been one of the worst-affected following the outbreak of the first wave of pandemic, is likely to receive a further setback due to the second wave, said industry experts.

“Credit offtake to the sector was poor from April to September last year, and the focus of most lenders was primarily on asset quality and taking care of existing customers. It is too early to comment on credit offtake to the sector this year; we will have to wait and see the impact of the second wave and how sooner or later we are able to contain it,” said Chamria.

MSMEs, which generate the largest employment in the country and contribute more than 35 per cent to GDP and 40 per cent of exports, are most vulnerable in any economic downturn and, in the present pandemic, they have been mostly locked down and are unable to perform any economic activity, said the council, highlighting the issues confronting the sector.

FIDC has further urged the RBI to regularise the benefit of PSL classification for lending by banks to NBFCs as part of the overall PSL policy. This will enable banks and NBFCs to cater to the needs to MSME sector in a more organised manner.

While the central bank has been extending, on an ad-hoc basis, the time-period for on-lending benefit by six months at the time of each review, however, it would be better if this was regularised.

Further, under the on-lending model, only fresh loans granted by NBFCs are allowed PSL benefit. The existing unencumbered pools of eligible PSLs do not qualify for such classification benefit.

“We, hereby, request the RBI to allow refinance, apart from by way of buy-out but also qualifying for hypothecation for DP for bank finance against existing unencumbered MSME pool originated by NBFCs,” said the letter.

Securitisation volume closed below the psychological ₹1-lakh-crore mark last fiscal (FY21 at ₹90,000 crore), down from the ₹1.9-lakh crore clocked in each of the previous two fiscals, according to Crisil Ratings.

Looking ahead, securitisation volumes in the near term could be impacted by rising Covid-19 cases and the resultant restrictions being imposed in a number of States, said the credit rating agency in a report

Fresh disbursements

Many NBFCs may be compelled to refocus their energies on collections, and fresh disbursements could take a back seat, it added.

“Containment measures, including a temporary suspension of movement (local and regional) and business activities, could inhibit borrower cash flows.

“If these impact collection efficiencies, they may again deflate returning investor confidence and inhibit securitisation volumes in the near term,” as per Crisil’s assessment.

Though securitisations surged in Q4 FY21 (to about ₹40,000 crore) to become the highest grossing quarter for the fiscal, they are still below pre-Covid levels.

One of the basic conditions for securitisation is legitimate sale or ‘true sale’ of underlying assets, which ensures the assets are not impacted due to bankruptcy of the seller after the sale – that is, they are bankruptcy remote of the seller.

“Over 100 entities securitised assets during the fiscal, with more than 15 entering the market for the first time. Private and public sector banks invested in more than two-thirds of securitisation issuances, while foreign banks invested in about 10 per cent.

“Mutual funds, insurance companies, NBFCs, and high-networth individuals (HNIs) accounted for bulk of the rest,” said Crisil in the report.

The agency observed that asset-backed securitisation (ABS) deals accounted for nearly two-thirds of securitised volumes in FY21 against 63 per cent in FY20.

Mortgage-backed securitisation (MBS) issuances, with underlying home loans and loans against property comprised the remaining, with investors drawing comfort from stable collection efficiency in MBS pools in the postmoratorium period.

Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, Crisil Ratings Ltd, said: “In the Indian milieu, mortgage loans have been appreciated as a safe asset class for investors, given low delinquencies and minimal losses historically.

“Bearing testimony to this, mortgage loan collection efficiencies recovered faster from the pandemic-driven slowdown than other asset classes last fiscal.”

Direct assignment (DA) transactions dominated issuance, with as much as 59 per cent (60 per cent in FY20) of the volume securitised through this route. Within DAs, issuance supported by the government-sponsored Partial Credit Guarantee Scheme accounted for 5 per cent of transactions. Securitisation through the pass-through certificate (PTC) route comprised the remaining 41 per cent (40 per cent).

Rohit Inamdar, Senior Director, Crisil Ratings Ltd, said: “The better-than-anticipated rise in volumes in the second half and, specifically final quarter of last fiscal, points to the resilience of this segment to interruptions brought on by the Covid-19 pandemic in the broader economy.”

Additionally, the track record of originators, improving collection ratios, and stable credit behaviour of borrowers may insulate the segment from much disruption in the current fiscal if the spread, intensity and duration of the pandemic and accompanying containment measures are not significant, he added.