Non banking finance companies (NBFC), which had witnessed a drop in disbursements and collections in Q1 (April-June) FY22, expect business to bounce back to the pre-pandemic levels by the end of this fiscal.
While collections have already started improving, disbursements are also expected to gain momentum in the run-up to the festival season, good monsoon and pent-up demand for credit across various sectors.
According to Mahesh Thakkar, Director General of Finance Industry Development Council (FIDC), Q1 of the current fiscal was not very good, but Q2 (July-September) is seeing an improvement. By Q3 (October-December) the industry should bounce back to around 95 per cent of the pre-pandemic levels.
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“Sales are picking up in the auto sector, demand is coming in from MSMEs… the monsoon has been good, and demand is there ahead of the festival season. People have learnt to live with the pandemic and are looking forward to go out. This will give a push to consumption. Spending will improve,” Thakkar told BusinessLine.
Growth in disbursements
Some of the NBFCs expect business to be back to pre-pandemic levels by Q2 of this fiscal.
Shriram City Union Finance (SCUF), for instance, expects disbursements to return to pre-pandemic levels by the second quarter of this fiscal, backed by a steady pick-up in demand across two-wheeler loans, loan against gold, personal loans, and MSME finance.
The NBFC is looking to aggressively push two-wheeler loans, which have witnessed very little delinquency, as well as gold loans. While it also plans to push personal loans and SME loans, however, it would continue to remain cautious and prefer to lend to existing customers, said YS Chakravarti, MD and CEO.
“We normally do disbursements worth ₹6,500-6,600 crore during a quarter. We have disbursed close to ₹2,000 crore in July alone, and we hope to register close to ₹6,000 crore during the second quarter of this fiscal,” he said.
According to Oommen K Mammen, CFO, Muthoot Finance, while disbursements were low in May, by the end of June it started picking up. The company is targeting a 15 per cent growth in assets under management (AUM) this fiscal.
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“In Q2 we are expecting a better business compared to Q1. The restrictions (across various States) are being relaxed, and people have started getting back (to business),” he said, indicating that it will push up the demand for credit. The AUM of the sector grew by a modest 4 per cent in FY21 vis-a-vis six per cent in FY20 (16 per cent in FY19). The housing finance companies (HFCs) grew by about 6 per cent during the last fiscal; within the other NBFC space, retail credit (consisting of vehicle, business loans, personal credit, microfinance) grew by four per cent, while the wholesale credit declined on a year-on-year basis, said a recent report by ICRA.
Overall, the sectoral AUM is expected to grow at 7-9 per cent in FY22, bolstered by the growth in NBFC retail credit and HFCs, which is expected to be about 8-10 per cent, while NBFC wholesale credit growth would remain muted, the report said.
Collections improve
The ICRA report further suggests that the risks for the NBFC sector remain elevated in the near term, and the revival is likely to happen in the next fiscal.
The second wave of Covid9 had a varied impact on the business and operations of NBFCs (private NBFCs, including HFCs). While large HFCs saw relatively limited impact on their collection efficiency (CE), other NBFCs, having exposure to several segments such as vehicle finance, business loans and microfinance, witnessed their CEs decline by about 20-25 per cent in May 2021 vis-a-vis the average Q4 (January-March) FY21 when the lockdown imposed by various States was more stringent and widespread. The CE improved marginally (up by three-to-five per cent) in June 2021 vis-a-vis May 2021 levels, with States steadily relaxing restrictions.
“The impact on CE was lower during Q1 FY22 compared to what was witnessed in Q1 FY21, and initial feedback indicates a further improvement in CE in July 2021. Sustenance of the same in the subsequent months and no further impediments in the revival trends would be crucial from an asset quality perspective. We note that the headline asset quality numbers for June 2021 would be significantly elevated vis-a-vis March 2021, but the same is expected to subside over a couple of quarters if the CEs continue to trend upwards in the subsequent months,” said AM Karthik, Vice President, Financial Sector Ratings, ICRA Ltd.
The restructured book for the NBFCs (excluding HFCs) is expected to move up to 4.1-4.3 per cent by March 2022, while the same for the HFCs is estimated to go up to 2-2.2 per cent. The overall sectoral restructured book is expected to double to 3.1-3.3 per cent by March 2022 vis a vis 1.6 per cent in March 2021.
“Notwithstanding the near-term pressures, the net increase (adjusting for write-offs) in the 90 plus days past due (90+dpd) in the current fiscal is expected to be about 50-100 basis points. ICRA draws comfort from the provisions maintained by the entities, which continue to remain about 100 bps higher than the pre-Covid levels,” Karthik added.
Comfortable liquidity
Liquidity cover at a number of NBFCs has improved from a year ago, putting them in a better position to service debt in the near-term, and cushioning the impact of lower collections because of the second wave, said a CRISIL Ratings study.
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That is a change from last year when asset-quality and liquidity fears multiplied after a moratorium on repayments and stringent lockdowns affected collections.
Fund-raising through special RBI and government schemes, improving collections in the second half of fiscal 2021, and limited disbursements are some of the factors that supported liquidity.
In the first half of last fiscal, nearly 45 per cent of the funds raised via bonds were through schemes announced following the first wave of the pandemic, such as the targeted long-term repo operations and partial credit guarantee. Even NBFCs that did not have strong parentage managed to raise close to 60 per cent of their incremental bond funding through these routes.
This apart, in the fourth quarter, debt market borrowings also began to rebound. Bond and commercial paper issuances in March 2021 saw the highest on-month rise since January 2020. Even bank funding improved to nearly seven per cent during January-March 2021. With collections picking up and disbursements subdued, liquidity was bolstered.
“Most CRISIL rated NBFCs have built significant on-balance-sheet liquidity. This will allow them to manage the impact of the second wave of the pandemic better than the first. Nevertheless, business challenges linked to the pandemic will continue through most of this fiscal. In this milieu, we expect many NBFCs to continue maintaining strong liquidity cover for debt repayments and operating expenses. That would also help them assuage potential investor/ lender concerns in the near term,” said Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, in the study.
