Tag: CRISIL Ratings

Capital expenditure by Central and State governments crossed their pre-pandemic levels faster than GDP: Crisil

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The capital expenditure by Central and State governments have crossed their pre-pandemic levels faster than the gross domestic product. While Covid necessitated huge spends by governments around the world, there was a simultaneous decline in their revenues, which led to higher fiscal deficit and debt, said a study by Crisil Ratings.

India’s fiscal deficit widened to 9.4 per cent of GDP in fiscal 2021 from 4.6 per cent logged in fiscal 2020. Despite this, the Central government capex was 31 per cent higher year-on-year this fiscal while that of States registered a modest rise over the low base of fiscal 2020.

The State capex is typically 1.4 times higher than that of Central government, thereby playing the predominant role in infrastructure building. This fiscal, the Centre has begun pruning certain spends, mainly revenue expenditure, as pandemic-related relief measures are rolled back, even as revenue collections have improved.

In the first half of this fiscal (April-September), the Centre had spent 41 per cent of its budgeted target for the entire year. On the other hand, State governments have managed to spend 29 per cent of their targets.

Govt capex

Government capex for April-October was ₹2.5 lakh crore. This is 28 per cent higher year-on-year (on a low base) and 26 per cent higher than the pre-pandemic, or fiscal 2020, level for the same period

Major capex has gone into road transport and highways, railways, housing, telecommunication, and health. Separately, rural development spending on rural roads, housing, and other infrastructure showed a 14 per cent increase over pre-pandemic levels, said the report.

In the first half capex of 16 States rose 78 per cent year-on-year. It was 17 per cent higher than in the same period pre-pandemic. These states had spent 29 per cent of their budget estimates in the first half.

While this might seem low, States typically tend to spend most of their capex budgets towards the end of the year.

Of the 16 States, six (Chhattisgarh, Kerala, Madhya Pradesh, Punjab, Rajasthan and Telangana) achieved the target set by the Ministry of Finance of spending 45 per cent of budget estimates by the first half.

This makes them eligible for availing of additional borrowing of 0.5 per cent of gross state domestic product for incremental capex in this fiscal.

On the other hand, Maharashtra, Odisha and Jharkhand lagged, having spent less than 20 per cent of budgeted capex in the first half.

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NBFCs assets to improve on tailwinds, says Crisil Ratings

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Assets under management (AUM) of non-banking financial companies (NBFCs) is set to grow 8-10 per cent to about ₹30-lakh crore in FY2023, riding on two tailwinds — improving economic activity, and strengthened balance sheet buffers, according to CRISIL Ratings.

This compares with an estimated growth of 6-8 per cent this fiscal (to about ₹27 -akh crore) and 2 per cent last fiscal (about ₹25-lakh crore AUM outstanding).

However, the credit rating agency cautioned that NBFCs face three headwinds — competition from Banks, expected increase in gross non-performing assets and funding access, which is yet to fully normalise.

The agency noted that intensifying competition from banks, flush with liquidity, that have sharpened focus on retail loans.

It assessed that GNPAs are expected to increase, mostly because of the revision in recognition norms and, to some extent, due to slippages from the restructured book.

Gurpreet Chhatwal, Managing Director, CRISIL Ratings Ltd, said: “Many NBFCs have built higher liquidity, capital and provisioning buffers in the recent past.

“That, combined with improving economic activity, puts them in a comfortable position to capitalise on growth opportunities. However, competition from banks will intensify.”

Asset quality worries have also manifested due to recent regulatory clarifications, and uncertainty over the performance of the restructured book.

While home loans and gold loans will be the least impacted, unsecured, and micro, small and medium enterprises loans will bear the brunt.

Chhatwal observed that net-net, growth will be driven by NBFCs with strong parentage and better funding access in the two largest segments — home loans and vehicle finance.

CRISIL noted that organic consolidation is also underway with larger NBFCs gaining share.

In three fiscals through 2021, the market share of the top 5 NBFCs has risen 600 basis points (bps) to 46 per cent.

The agency said the ability to identify niches that cater to the relatively difficult-to-address customer segments and asset classes will fuel long-term growth for the sector.

CRISIL expects retail loans to see reasonably broad-based growth in the current and next fiscals supported by pick-up in demand and consequently underlying sales.

Gold, home and unsecured loans should clock the fastest growth rates. On the other hand, wholesale credit would continue to degrow as platforms such as alternate investment funds gain currency.

Stressed assets

The agency expects GNPAs to increase by 25-300 basis points (bps) based on asset class because of the new recognition norm.

However, the increase in GNPAs because of the revised recognition norms will be largely an accounting impact because, given the improving economy, the credit profiles of borrowers are not expected to deteriorate. Consequently, ultimate credit losses are not expected to change significantly.

CRISIL said the performance of the restructured book is a key monitorable.

The agency noted that while there has been across-the-segment improvement in the monthly collection efficiency ratio (MCR) of NBFCs for the quarter ended September 2021, the quantum of restructuring done under the RBI Resolution Framework 2.0 is more than last year.

Since this mostly involved offering moratorium, the performance of this book after moratorium is monitorable.

Overall, fragile assets (GNPAs + slippages due to the impact of regulatory norms and from the restructured book) are seen at ₹1.3-1.6 lakh crore, tantamount to 5-6 per cent of the industry’s AUM as of March 2022.

This does not factor in the impact of a third wave of Covid-19, especially the just-discovered Omicron variant, which is a risk factor.

Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings Ltd, said, “While there may be apprehensions about rising reported GNPAs, additional disclosures by NBFCs around underlying delinquency profiles and collection efficiencies can help allay them.

“Those with low leverage, high liquidity and strong parentage are expected to benefit from better funding access at optimal rates. For the rest and especially mid-sized and smaller players, co-lending, securitisation, or other partnerships with banks will facilitate a funding-light business model.”

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AUMs of NBFCs to rise 18–20% y-o-y this fiscal: Crisil Ratings.

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Assets under management (AUM) of non-banking financial companies (NBFCs), which primarily offer loans against gold, are expected to rise 18–20 per cent to ₹1.3 lakh crore this fiscal against ₹1.1 lakh crore in FY21, according to Crisil Ratings.

The credit rating agency said that this growth would be despite a contraction in the first quarter, when pandemic-driven lockdown measures hindered branch operations and kept potential borrowers away.

The agency added that demand for gold loans from micro enterprises and individuals — to fund working capital and personal requirements, respectively — has increased with a pick-up in economic activity and the onset of the festive season, which coincides with the easing of lockdown restrictions by several States.

Sought-after asset

Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, said, “Gold-loan disbursements have rebounded sharply in the second quarter of this fiscal after a dismal first quarter. We expect this momentum to continue for the rest of this fiscal.”

He emphasised that gold loans will continue to be a sought-after asset class, while lenders would remain cautious about growth in many other retail asset classes.

Also see: NBFCs: No need to press the panic button yet

From a credit perspective, gold loans are a highly secured, liquid asset class that generates superior returns with minimal credit losses, the agency said.

Therefore, NBFCs that offer them are better placed than those extending loans to most other retail asset classes, especially in times of asset-quality pressure spawned by the pandemic.

Risk management

The agency noted that historically, gold-loan NBFCs have seen negligible losses because of robust risk management practices such as periodic interest collection (which keeps the loan-to-value, or LTV, under check) and timely auctions of gold.

Also see: What’s next for gold loans after the pandemic?

“Maintaining LTV discipline adds to the comfort. But sharp swings in the price of gold impacts both, the portfolio and disbursement LTV, as it influences the cushion available with lenders.

“Lenders faced this issue last fiscal because gold prices fell sharply between January and March 2021, after the August 2020 peak,” the agency said.

NBFCs vs banks

On their part, NBFCs have manoeuvred the situation well, Crisil Ratings said, adding that banks, on the contrary, were less proactive and so have seen a rise in delinquencies and faced challenges in rolling over a part of their portfolio to 75 per cent LTV (as per current Reserve Bank of India guidelines) after the 90 per cent LTV dispensation ended in March 31, 2021.

Banks’ loan against gold jewellery portfolio grew by about 80 per cent in FY21.

Ajit Velonie, Director, Crisil Ratings, observed that gold-loan NBFCs have been swift in calibrating disbursement LTV while also implementing strong risk management practices to keep portfolio LTV in check.

Also see: IIFL Finance launches instant business loan on WhatsApp

Besides ensuring periodic interest collection, they do not flinch from conducting auctions when required — which rose sharply in March and April 2021 — to avert potential asset-quality challenges.

Velonie said timely auctions have ensured that credit costs — a more appropriate indicator of asset quality for gold-loans — remained in check at 30 basis points, well within the historical range.

With leverage being low and pre-provision profitability remaining strong, Crisil Ratings expects the overall credit profile of gold-loan NBFCs to remain stable.

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Banks’ credit outlook ‘stable’ for FY22, says Crisil Ratings, BFSI News, ET BFSI

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Crisil Ratings has kept a ‘stable’ credit outlook for banks for the second half of financial year 2022.

Strong capitalisation will remain a key factor for private banks to have a stable credit growth, while public sector banks benefit from government support.

However, privatisation of two public sector banks, as announced in Union Budget 2021-22, will be eyed.

Banks’ credit growth is expected to revive 9-10% in FY22, after a fall of around 5% in FY21, the agency said, adding that profitability of the banking sector is set to improve over the medium term.

Gross non-performing assets are likely to touch 10-11% by the end of this fiscal.

According to reports, the GNPA is at 8-9%, supported by government schemes and restructuring dispensation, the agency said. In FY18, the GNPA had hit a peak of 11.2%.

The NPA level improved because banks have lowered their provisioning levels from before, thereby limiting the impact of legacy NPAs on future earnings, Crisil said, in its half yearly ratings round up report.

Retail segment growth is expected to return to the mid-teens this fiscal, after a slow growth reported a year ago. Within retail, housing loans, which constitute more than half of retail advances for banks, saw slow growth last fiscal, but demand remains strong over the long term, the agency said.

With rising affordability and the recent trend of working from home, demand for own houses and larger houses are likely to rise, and banks will benefit from lower competition from non-banks as well as surplus liquidity, it added.

However, a potential third COVID-19 wave remains a key near-term risk, while deceleration in economic and demand growth, both global and domestic, due to tapering of monetary and fiscal stimuli will be key medium-term risks.

The impact of the third wave is likely to be contained due to the increase in the pace of inoculations, with nearly 70% of the adult population receiving at least one dose.

For non-banking financial companies, the agency expects better credit quality than last year, but has retained a ‘monitorable’ outlook.

The credit quality growth for NBFCs is expected to pick up to 6-8% in FY22 from 2% in FY21. However, it remains lower than the pre-pandemic level of 18%.

Crisil expects NBFCs to witness an uptick in stressed assets as MSME and unsecured loans have been hit the most. However, loans to other sectors have been relatively resilient.

Asset quality in these segments continue to be impacted the most, with delinquencies rising almost 300 basis points in June 2021 against March 2021 levels, despite higher restructuring and write-offs last fiscal compared with other asset classes. Delinquency levels for these segments will remain elevated given a likely higher recovery period for borrowers, Crisil said.

Improved capitalisation and strong parentage will be key support factors for non-bank lenders. The agency noted that many NBFCs have strengthened their provisioning buffers, factoring in the COVID-19 crisis, leading to more comfortable liquidity in the sector.

Crisil expects the sector to witness organic consolidation with stronger NBFCs, who have strong parentage, and gain market share.

Performance on asset quality and impact on earnings will remain key monitorables for NBFCs.



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Securitisation pool collections improve as restrictions ease: Crisil Ratings

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With the gradual phasing out of social restrictions, there has been an improvement in the monthly collection ratios of securitised pools rated by Crisil Ratings.

These had declined between April and June 2021 following the second wave of the Covid-19 pandemic.

“The trend in improving collection efficiencies has been seen across asset classes and in a number of segments, the levels are quite close to pre-pandemic levels. Collection ratios in mortgage-backed securitisation (MBS) pools have rebounded to near-100 per cent―their pre-pandemic normal ― in the pay-out months of July and August 2021,” Crisil Ratings said on Monday.

MBS pools, with home-or property-backed loans as underlying, have shown extremely high resilience across economic cycles.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, Crisil Ratings, “In asset-backed securitisation (ABS) pools, collection ratios are set to reach January-March 2021 pay-out levels after dipping to 84 per cent in the first quarter this fiscal.”

Median collection

Median collection ratios for vehicle loan pools for August pay-out reached 100 per cent, just a tad short of the March collection ratio of 101 per cent, he further said.

Similarly, in the case of two-wheelers and small and medium enterprise (SME) loan pools, collection ratios have risen to 98 per cent and 90 per cent in August from 95 per cent and 78 per cent respectively, for June pay-out.

“The government’s focus on rural areas and agriculture, and launch of schemes for SMEs have helped here,” Crisil said.

Rohit Inamdar, Senior Director, Crisil Ratings, said, “Securitisation volume after the second wave remains a pale shadow of what it was before the pandemic began. What’s encouraging, however, is the limited decline in collections after the second wave. The ongoing recovery should improve investor confidence and increase interest in securitisation transactions.”

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Securitisation pool collections improve as restrictions ease: Crisil Ratings

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With the gradual phasing out of social restrictions, there has been an improvement in the monthly collection ratios of securitised pools rated by Crisil Ratings.

These had declined between April and June 2021 following the second wave of the Covid-19 pandemic.

₹1 crore, minimum ticket size to issue securitisation notes: RBI

“The trend in improving collection efficiencies has been seen across asset classes and in a number of segments the levels are quite close to pre-pandemic levels.

Resilience across cycles

Collection ratios in mortgage-backed securitisation (MBS) pools have rebounded to near-100 per cent ― their pre-pandemic normal ― in the pay-out months of July and August 2021,” Crisil Ratings said on Monday.

Securitisation volume improves in Q3 on revival in economy: Crisil

MBS pools, with home-or property-backed loans as underlying, have shown extremely high resilience across economic cycles.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, Crisil Ratings, “In asset-backed securitisation (ABS) pools, collection ratios are set to reach January-March 2021 pay-out levels after dipping to 84 per cent in the first quarter this fiscal.”

Median collection ratios for vehicle loan pools for August pay-out reached 100 per cent, just a tad short of the March collection ratio of 101 per cent, he further said.

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CRISIL upgrades Bank of India’s Tier-I Bonds rating

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CRISIL Ratings has upgraded its rating on the Tier-I bonds (under Basel III) of Bank of India (BoI) to ‘AA/Stable’ from ‘AA-/Stable’. The credit rating agency has also assigned its ‘AA+/Stable’ rating to the public sector bank’s ₹1,800 crore Tier-II bonds (under Basel III).

The upgrade in the rating of Tier-I bonds (under Basel III) factors in improved position of BoI to make future coupon payments, supported by an adjustment of accumulated losses with share premium account, and the improved capital ratios, CRISIL said in a statement.

“Pursuant to the adjustment, the eligible reserve to total assets ratio for the bank has improved,” it added.

Additionally, as per the Department of Financial Services Gazette notification of March 23, 2020, referred to as Nationalised Banks (Management and Miscellaneous Provisions) Amendment Scheme, 2020, the bank still has share premium reserves which can be utilised to set off any losses in future, and this supports the credit profile of Tier-I (under Basel III) instruments.

Also read: Imitating a fintech firm not the right business model: Former RBI Deputy Gov

“However, any substantial depletion of the share premium account or any regulatory changes to appropriation of the share premium account pertaining to adjustment of accumulated losses are key monitorables,” CRISIL said.

The agency emphasised that supported by the regular capital infusion made by the government of India (GoI) and higher accrual, BoI’s capital ratios have improved, as reflected in Tier-1 and overall capital to risk-weighted adequacy ratio (CRAR) of 12 per cent and 15.1 per cent, respectively, as on June 30, 2021 as against 9.5 per cent and 12.8 per cent, respectively, as on June 30, 2020 (12.0 per cent and 14.9 per cent, respectively, as on March 31, 2021).

Further, the recent qualified institutional placement (QIP) of ₹2,550 crore in August 2021, should also support the capital position.

The overall ratings continue to reflect the expectation of strong support from the majority stakeholder, GoI, and the established market position and comfortable resource profile of the bank. “These strengths are partially offset by weak asset quality and modest earnings profile,” the agency said.

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Crisil Ratings revises India Inc’s credit quality outlook to ‘positive’

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Crisil Ratings has revised the credit quality outlook of India Inc for fiscal year 2022 to ‘positive’ from ‘cautiously optimistic’ earlier.

Subodh Rai, Chief Ratings Officer, Crisil Ratings said, “Our outlook factors-in strong economic growth, both domestic and global, and containment measures that are localised and less stringent compared with the first wave, which should keep domestic demand buoyant even if a third wave materialises. We believe India Inc is on higher and stronger footing.”

The credit ratio (upgrades to downgrades) in the first four months of this fiscal improved to more than 2.5 times. It had touched a decadal low of 0.54 time amid the first wave in the first half of fiscal 2021, before recovering to 1.33 times in the second half, buoyed by a rebound in demand.

Broad-based recovery

A Crisil Ratings study of 43 sectors (accounting for 75 per cent of the ₹36 lakh crore outstanding rated debt, excluding the financial sector) shows the current recovery is broad-based. As many as 28 sectors (85 per cent of outstanding corporate debt understudy) are on course to see a 100 per cent rebound in demand to pre-pandemic levels by the end of this fiscal, while six sectors will see upwards of 85 per cent.

Among sectors with the most rating upgrades, construction and engineering, and renewable energy benefited from the government’s thrust on infrastructure spending, while steel and other metals gained from higher price realisations and profitability. Pharmaceuticals and specialty chemicals continued to see buoyancy backed by both, domestic and export growth.

But contact-intensive sectors such as hospitality and education services continue to bear the brunt of the pandemic and have had more downgrades than upgrades.

To be sure, targeted relief measures by the Reserve Bank of India (RBI) and the government amid the second wave have cushioned credit profiles in some sectors.

Somasekhar Vemuri, Senior Director, Crisil Ratings said, “Besides regulatory relief measures, a secular deleveraging trend has provided India Inc the balance sheet strength to cushion impact on their credit profiles. The median gearing for the CRISIL Ratings portfolio (excluding the financial sector) declined to ~0.8 time at the end of fiscal 2020 and then to an estimated ~0.7 time in fiscal 2021, from ~1.1 times in fiscal 2016.”

That said, unsecured retail and micro, small and medium enterprise loan segments are likely to witness higher stress over the near term. “The key monitorables from here would be a fat tail in the second wave or an intense third wave. Other risks to the positive credit outlook include regional and temporal distribution of rainfall and its implications for sustained demand recovery. Small businesses, in particular, will be more vulnerable to any slack in demand,’ the ratings agency said.

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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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CRISIL, BFSI News, ET BFSI

Personal Finance

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Over the last six months, the gold price has corrected 10% on a 30-day rolling basis, although it has dropped double that amount on an absolute basis.

According to CRISIL Ratings, the recent drop in gold prices is unlikely to have a significant effect on the asset quality of non-banking financial companies (NBFCs) that lend against gold. However, Banks that disbursed gold loans aggressively during the previous fiscal year may see an impact on their asset quality.

In addition to receiving interest on a regular basis, NBFCs have ensured that the disbursement loan-to-value (LTV) is held below 75 percent over the past few fiscals. The average portfolio LTV for NBFCs was 63-67 percent as of December 31, 2020, while the average LTV on incremental disbursements in the October-December 2020 quarter was 70 percent. Interest receivables have remained at just 2-4 percent of the loan book over the last few years, demonstrating the LTV discipline.

Banks, on the other hand, had a higher incremental-disbursement LTV of 78-82 percent than NBFCs. Most of their book’s growth occurred in the third quarter of last fiscal year, when gold prices were soaring. In the 11 months through February 2021, Bank loans against gold increased by 70% to over Rs 56,000 crore. Announcement made by Reserve Bank of India (RBI), August 2020 that the LTV limit would be relaxed to 90% (only for banks), contributed to this growth.

Krishnan Sitaraman, Senior Director & Deputy Chief Ratings Officer, CRISIL Ratings, said, “Without periodic interest collections, banks’ books can be vulnerable to asset-quality issues to some degree, given that gold prices have fallen 18-20% from their August peaks on an absolute basis. However, with the LTV dispensation period ending in March 2021, incremental lending would have more LTV cushion.”

Cushion available with lenders in terms of the value of gold provided as collateral relative to the loan outstanding is influenced by LTV and timely interest collection. As a result, reliable risk management systems and timely auctions are critical for mitigating gold price fluctuations and eventual credit loss.

Ajit Velonie, Director, CRISIL Ratings, said, “While gross non-performing assets (GNPA) could rise, ultimate credit cost – a more appropriate indicator of asset quality for gold loans – is not expected to. Although NBFCs’ GNPAs had risen to as high as 7%, credit costs were still low at 10 to 80 basis points. This demonstrates sound business judgement and timely auctions. Given the rapid growth that banks have experienced, tracking LTV, and remaining agile is critical for avoiding possible asset-quality issues.”



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