Tag: collection efficiency

Equitas Small Finance Bank collection efficiency improves in July

Banking & Finance

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Equitas Small Finance Bank on Wednesday said its collection efficiency has improved to 104.62 per cent in July, up from 83.49 per cent in the previous month. However, the collection efficiency of the lender is still lower than 105.16 per cent recorded in April 2021.

On a product-wise basis, month-on-month collection efficiency in Microfinance went up to 91.76 per cent in July from 66.90 per cent in June while the collection efficiency of Small Business Loans went up to 109.19 per cent (85.14 per cent) during the period.

Equitas Small Finance Bank’s Q1 net profit drops 79%

Vehicle finance witnessed a collection efficiency of 99.75 per cent in July (89.33 per cent) while the efficiency in Corporate loans went up sharply to 159.91 per cent (103 per cent).

The overall billing efficiency of the Chennai-based lender also went up to 83.86 per cent in July from 69.52 per cent in the previous month. However, billing efficiency in July is lesser than 91.12 per cent recorded in March 2021.

Last week, the bank reported a net profit of ₹11.93 crore for the first quarter, 79 per cent down from the net profit of ₹57.67 crore posted for the same quarter last year.

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Collection efficiency of bank loans improves in June, BFSI News, ET BFSI

Banking & Finance

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Chennai: Banks witnessed an improvement in loan collection efficiency in June after states relaxed multiple lockdowns as the second Covid wave recedes.

For Equitas Small Finance Bank, collection efficiency for vehicle loans has come back to 89.3% in June, from 67.35% in May. While for microfinance loans, it is back at 66.9% from 63.6% and for small business loans it is back at 85.1% from 76.8%.

Its MD P N Vasudevan, “The Bank’s borrowers are largely in the informal segments dealing in daily use products and services which were temporarily disrupted due to the Covid-19 restrictions imposed. However, during June, states in the West and North experienced improved collection efficiencies as lockdowns eased while Southern states opened up towards the end of the month. We anticipate a sharp improvement in collections in the coming months as Covid wave recedes.”

For Indian Overseas Bank, the loan collection efficiency rate for small loans, vehicle and housing loans has improved to 85% between June and July from 70%-75% in May. The state-owned bank expects the recovery to be better in the September quarter, as it expects a large recovery of loans.

City Union Bank’s managing director N Kamakoti said that on an overall level, collection efficiency has recovered significantly in June as businesses have understood and adapted to lockdowns better.

A research note from Kotak on banks’ asset quality Kotak said that the recovery environment showed improvement in 1QFY22 though it is still not fully normal. There is likely to be more discussion on the recovery environment for 2QFY22 given the impact of the second Covid wave. Besides small loans, the report said it expects banks to provide a positive outlook on corporate recovery especially given a few large resolutions that have been completed/will be completed soon.



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NBFC-MFIs: Risk of protracted delinquencies remains, says CRISIL

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A hit to the collection efficiency of microfinance institutions (NBFC-MFIs) owing to protracted Covid-19 curbs will increase asset-quality pressures in the sector, with loans in arrears for over 30 days likely to cross the surge in the aftermath of demonetisation (DeMon), cautioned CRISIL Ratings.

With loans in arrears for over 30 days – or the 30+ portfolio at risk (PAR) mounting, the MFI sector is expected to resort to restructuring of loans to a larger extent than last fiscal as this is perhaps the only practical option to support borrowers and not let accounts slip into the non-performing bucket, the credit rating agency said in a note.

CRISIL Rating assessed that the 30+ PAR could rise to 14-16 per cent of portfolio this month from a recent low of 6-7 per cent in March. This number had surged to 11.7 per cent in March 2017, in the aftermath of demonetisation.

“But unlike last fiscal, when loan moratorium helped keep delinquency increases at bay, more MFIs are likely to opt for permitting restructuring under the Reserve Bank of India (RBI)’s Resolution Framework 2.0 announced last month, and continue with higher provisioning,” CRISIL Ratings said.

Ground level challenges

Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, observed that the medical impact of the second wave of the pandemic has been much worse than the first wave, and afflictions have percolated to the rural areas too.

“Ground-level infrastructural and operational challenges, as well as restrictions on movement of people, have impinged on the MFI sector’s collection efficiency.

“Though overall collection efficiency is expected at 75-80 per cent in May, compared to 90-95 per cent in March, pressure on asset quality would be higher as borrowers do not have a blanket moratorium this time, while their cash flows have been impacted by the second wave,” opined Sitaraman.

Considering the current ground-level challenges, the note emphasised that encouraging collections through the digital mode is imperative for MFIs – the way they have transitioned to cashless disbursements.

Restructuring, Delinquencies & Provisioning

With 30+ PAR mounting, CRISIL Ratings is of the view that the demand under restructuring 2.0 could be in high-single digits compared to 1-2 per cent seen during restructuring 1.0 for the overall sector.

“Yet, the risk of protracted delinquencies eventually leading to credit costs staying elevated, remains.

“For one, borrowers’ track record of repayment ability is yet to be established for already restructured portfolios. Two, lack of prudence is also a possibility,” the note said.

CRISIL estimates that close to half of the total assets under management (AUM) of NBFC-MFIs of about ₹80,000 crore as on March 2021, were generated from December 2020 onwards.

Given the relatively vulnerable credit profiles of borrowers and the fact that local economic activity is yet to normalise, sustainability of collections, especially for the recent disbursements, will be the key monitorable in the coming quarters, it added.

Ajit Velonie, Director, CRISIL Ratings, said: “To be sure, NBFC-MFIs have created provisions (including a special Covid-19 provision in the fourth quarter last fiscal) estimated at 3-5 per cent of the AUM as on March 2021.

“Considering the likely rise in delinquencies and restructuring, higher-than-normal provisioning is warranted even in the first half of this fiscal to absorb the shocks.”

NBFC-MFIs with adequate liquidity, lower leverage, or those backed by strong parentage, will be better placed to withstand the current situation, he added.

According to CRISIL Ratings, large MFIs rated by it are either backed by strong parentage with access to capital, or have comfortable capitalisation with gearing at about 3-3.5 times, which should allow them to withstand the stress.

They also have the liquidity to cover over two months of debt repayments – even after assuming nil collections – because disbursements have been low, too, which has helped conserve cash.

Nevertheless, the trajectory of recovery, access to incremental funding and capital position will bear watching, especially of the smaller MFIs, the agency said.

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IIFL Finance expects 15% AUM loan growth in FY22

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The partial lockdowns imposed by few states due to Covid-19 may have some impact on the business, but Rajak claimed that nothing was visible on-ground yet. Representational Image

By Ankur Mishra

IIFL Finance expects loan assets under management (AUM) to grow by 15% in the financial year 2022 (FY22), CFO Rajesh Rajak told FE. The lender is finding comfort from loan growth due to improved collections in the recent months. Without specifying details, Rajak said collection efficiency had sustained the trend after good show till December 2020. The collection efficiency had improved to 98-100% in home loans, 85-90% in business loans, more than 100% in gold loans and the micro-finance segment till December 2020.

The partial lockdowns imposed by few states due to Covid-19 may have some impact on the business, but Rajak claimed that nothing was visible on-ground yet. “If there is an extreme situation, we will get affected like everyone else but the whole idea will be to get impacted lesser than the industry,” Rajak said.

Last week, rating agencies Crisil had revised its rating on company’s arm IIFL Home Finance to ‘stable’ from ‘negative’. “The current outlook back to ‘stable’ revision factors in the continuous improvement in collection efficiency (excluding foreclosures) resulting in the uptick in asset quality metrics being lower than previous expectations despite weak macroeconomic environment,” Crisil said. The outlook revision also factors in the improvement in fund raising of the company, the rating agency said. IIFL Finance had raised `670 crore from non-convertible debentures (NCDs) in March 2020. Earlier in March, another rating firm Fitch had affirmed IIFL Finance’s long-term issuer default rating (IDR) at ‘B+’ and removed it from rating watch negative (RWN). This reflects Fitch’s view of easing downside risk to the company’s credit profile due to less adverse economic and funding conditions, which we expect to be broadly sustained in the coming year, the rating firm said.

Analysts at Kotak Institutional Equities said the fourth quarter (Q4FY21) was a strong quarter for non-banking financial companies (NBFCs), with disbursements picking up sequentially across the board, driven by moratorium exit, pent-up and seasonally strong demand.

“While disbursements were strong, loan growth may be muted. Weak new business momentum in the first half of FY21 will likely drag loan growth for the next few quarters and bottom out sometime in FY22,” the Kotak Institutional Equities report said on Tuesday.

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‘In Q4, we are looking at growing the business, but methodically’

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The micro-finance sector is showing signs of improvement barring some lagging areas and customer sets. However, there is demand for credit, said Nitin Chugh, Managing Director and CEO, Ujjivan Small Finance Bank. In an interview with BusinessLine, he also spoke on the new products the bank is working on and discussed the third quarter results. Excerpts:

How is the micro-finance sector doing now?

In general things have improved, which is coming up in the collection efficiency of 94 per cent to 95 per cent. We had reported in our second quarter results that we have problems in Maharashtra, Punjab, and West Bengal, and haven’t come back to the pre-Covid level. In Assam, while things were improving, we have had a setback in January due to the loan waiver announcement by political parties, and (that) has resulted in 9 per cent drop in collection efficiency (during the month).

Even in customer segments, there is some divergence. Customers with general stores, and dairy were able to come back rather quickly. Those in small-scale manufacturing are taking longer to come back. Customers like housemaids, drivers, restaurant staff and mall workers were impacted for a much longer time.

Also read: Ujjivan SFB reports net loss of ₹279 cr in Q3

How has the restructuring process been?

You can’t expect or even plan for such things. The moratorium got over on August 31, 2020. September was the first month when customers started making payments. We had a collection efficiency of 83 per cent for payments, which improved to 88 per cent in October. But there are customers who are finding it difficult to pay after the moratorium got over. The whole estimation process started from October; we started talking to customers and did a full detailed survey. We spent December holding individual conversations and completing the whole process.

How is credit demand? You have reported strong disbursement in the third quarter.

Credit demand has started to come back as people started going back to their livelihoods.

Disbursement is even stronger in January. Demand is from all across. We did our highest ever in January in the affordable housing business. In MSME also, we did our ever highest in January. In micro-banking, we are back to pre-Covid level and exactly what we were in January 2020. In fact, in December 2020, we did even better than December 2019 in micro-finance. Likewise in vehicle finance. In the fourth quarter, we are looking at growing the business now but doing it methodically with the appetite for risk that we have.

You are working on gold loans…?

We are still learning the business. We are in pilot stage right now. We started in October with five branches, all of them in Bangalore. The first two months were not very remarkable as we were trying to do this more through word of mouth. We will launch it at scale in the next fiscal year. It is an unmet demand of our customers.

Also read: Assam MFI Bill may hit collections in short term

Any other new areas of lending?

In vehicle finance, we are testing MMCV (micro and mini commercial vehicle) loans. We are likely to make an entry into that segment. We were also evaluating the used car segments but with the Budget announcements on voluntary scrapping policy, we need to do some rethink on that. The segment of customers we deal with, they usually buy five- to seven-year-old vehicles and they buy them for a long period of time.

We are also looking to introduce credit cards in the next financial year. We have a substantially large base of retail, non-micro-finance customers. We have a large base with close to a million customers and the demand for these products is coming from them. We will also look at any other relevant product. Also, maybe lockers in a few of our branches.

Are you worried about stress on your books?

Now, we are not. We have taken all provisions upfront in the third quarter. Stress is emerging right now, the NPAs are at a standstill. We already had a cover on our books of 4.1 per cent to 4.2 per cent in the last quarter. It wasn’t that we were not adequately covered, we had taken provisions in the last three quarters also. We took the decision to upfront everything. Let us not live with any uncertainty and not worry about future credit loss, so that we can focus on growth.

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SFBs should focus on bottomlines to withstand adverse shocks: RBI

Banking & Finance

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Small Finance Banks (SFBs) may need to focus on their bottomlines as and when financial conditions tighten, according to a Reserve Bank of India (RBI) report.

The “Report on Trend and Progress of Banking in India 2019-20” observed that the prevailing easy liquidity conditions facilitate borrowings and refinance on which SFBs rely. Currently, there are 10 SFBs in the country.

The central bank said the risk absorption cushions in the form of provision coverage ratio (PCR) is low in some SFBs, impacting their ability to withstand adverse shocks.

The report said those SFBs, which were earlier NBFC micro finance institutions (NBFC-MFIs), continue to have significant exposure to unsecured advances even as they strive to diversify their portfolio.

Green shoots in the form of revival of agriculture and allied activities may augur well for financials of these banks, it added.

The RBI noted that collection efficiency of these banks had dropped substantially during the strict lockdown period but since then there is a strong improvement on a month-to-month basis and a catch-up with pre-pandemic levels may, in fact, be under way.

In FY20, SFBs deposits jumped 48.1 per cent year-on-year (y-o-y) to ₹82,488 crore. Their loans and advances rose 29.7 per cent y-o-y to ₹90,576 crore. Investments were up 40 per cent y-o-y to ₹24,203 crore.

The RBI observed that these banks have smaller low-cost current and saving account (CASA) deposit bases.

SFBs were set up in 2016 to provide basic banking services such as accepting deposits and lending to the unserved and the under-served sections of society, including small businesses, marginal farmers, micro and small industries, and the unorganised sector.

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Three metrics to look for in NBFC results

Personal Finance

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If you’ve invested in fixed deposits with finance companies (NBFCs) or small finance banks (SFBs), the new business risks created by Covid-19 have made it necessary for you to keep a hawk eye on their financials. Borrowers, hit by income cuts, have been delaying loan repayments.

The RBI had directed lenders to declare a holiday (moratorium) on repayments until August 31. The Supreme Court has been hearing a case on extending this holiday, while stopping lenders from recognising bad loans until it decides.

With these developments, the already jargon-packed results from banks and NBFCs have acquired some new terms. Here are three new metrics you need to get a grip on.

Collection efficiency

The collection efficiency ratio is one performance metric that has materially moved NBFC and small finance bank (SFB) stocks in the recent results season. This is the proportion of loans that a lender has collected in the month or quarter to the outstanding dues at the beginning of the period. The closer it is to 100 per cent, the greater the comfort that borrowers are repaying their dues on time.

During the April-June lockdown, sudden income shocks and the inability of collection agents to visit borrowers severely impacted the collection efficiency of SFBs that gave out micro-finance loans.

Equitas Small Finance Bank, for instance, saw its overall collection efficiency fall to 11 per cent in April. But with unlocking and revival, it improved to 94.3 per cent by October. The ratio can vary for different types of loans.

Stage 1, 2 and 3 assets

Earlier, Indian lenders reported their doubtful loans based on defaults they had already incurred. Loans unpaid for over 90 days were treated as non-performing assets (NPAs). But with Ind AS, lenders such as NBFCs are now required to use an “expected credit loss”, or ECL framework, to recognise doubtful loans.

Here, each lender is expected to forecast expected defaults over the next 12 months and over the life of each loan. These are, in turn, classified and disclosed as Stage 1, Stage 2 and Stage 3 loans.

Stage 1 loans are those where the lender has not seen any change in default risk from the time of disbursement. Stage 2 loans are those where there has been some increase in the default risk from the date of giving out the loan, though there is no objective evidence of this.

Stage 3 loans are those where there’s objective evidence of defaults. The proportion of Stage 2 and Stage 3 loans in an NBFC’s books and the provisions against them can tell you if a big spike in NPAs is coming in future quarters.

Proforma NPAs

With the apex court imposing a standstill on recognising defaults after August 31 as NPAs, official NPA numbers reported by lenders no longer reveal the true state of bad loans. To get around this , some lenders have taken to disclosing ‘proforma NPAs’.

Proforma gross and net NPAs tell you what the lender’s NPAs would have looked like, if it had continued to recognise bad loans without applying the court concessions.

Bajaj Finance, for instance, has said that its proforma gross NPAs and net NPAs for the September quarter would have been 1.34 per cent and 0.56 per cent, respectively, instead of the reported 1.03 per cent and 0.37 per cent, had the SC concession not applied. This is a more reliable estimate than that reported.numbers.

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