Tag: India Ratings

India Ratings: RBI’s new norms likely to increase NBFCs’ bad loans by one-third

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However, NBFCs would have to invest in systems and processes to comply with daily stamping requirements, India Ratings said, adding that it understands that NBFCs have presented to the RBI for providing a transition period on this requirement.

Non-banking finance companies (NBFCs) will likely see around one-third rise in their non-performing assets (NPAs) after the Reserve Bank of India’s (RBI) latest clarification on upgradation of non-performing non performing assets (NPAs) kicks in.

On November 12, the central bank said loan accounts classified as NPAs may be upgraded to ‘standard’ assets only if the entire arrears of interest and principal are paid by the borrower. The rule will apply to both banks and NBFCs.

India Ratings said NBFCs will likely have modest impact on provisioning because of the clarification as such lenders are using Indian Accounting Standard (IND-As), and generally for higher-rated NBFCs, provision policy is more conservative than income recognition, asset classification (IRAC) requirements. However, NBFCs would have to invest in systems and processes to comply with daily stamping requirements, India Ratings said, adding that it understands that NBFCs have presented to the RBI for providing a transition period on this requirement.

“Accounts can get into NPA category just for a day’s delay in paying the instalments and once it gets categorised as NPA it will not be able to become standard unless all the arrears are cleared. So, in other words, accounts would get categorised as NPAs at a faster pace and would remain sticky in that category for a longer period of time. Both these accounting treatments would result into higher headline number for NBFCs. It may so happen that NBFCs would disclose NPA numbers as per IRAC norms and stage 3 numbers as per Ind-As separately in their disclosures,” India Ratings said.

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CP market: Improving risk appetite needs close monitoring, says Ind-Ra

Banking & Finance

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Sustained easy money alongside improving risk appetite, as signified by the trend of overall rising number of issuances in the primary Commercial Paper (CP) market, coupled with healthy volumes in the second quarter (2Q) of FY22, requires close monitoring, according to India Ratings (Ind-Ra).

The credit rating agency has noticed certain instances of risks building up in relation to high-rated corporates raising short-term debt to take arbitrage opportunities because of low rates in the CP market.

For India Inc, low-cost CP is preferred route

The risk appetite in the system has improved, particularly in 2QFY22, driven by the strong corporate performance, buoyant external conditions and sustained ultra-loose monetary policy conditions, said Nikhil Changulani, Analyst, Ind-Ra, in a report.

The agency observed that a few large corporates, who have access to CPs at the cheapest cost (sub 4 per cent), are using arbitrage opportunities by increasing the use of CPs and enhanced drawings from some banks, thus opening up risks in the system.

Ind-Ra believes the risks to be presently limited to a few cases; but if not addressed could accentuate and spread to the wider baskets.

CP: market resilient in 2QFY22

Changulani noted that the CP market trend suggests that the market has shown resilience during 2QFY22 amid the uncertain period of the second wave of Covid-19.

“The overall rising number of issuances in the primary CP market coupled with healthy volumes has been the trend. Moreover, the rising number of issuers in a month suggests broadening of the market although there is a concentration risk pertaining to the tenor of borrowings.

Commercial paper issuances by corporates gather steam despite second Covid wave

“The risk appetite in the system has improved, particularly in 2QFY22, driven by the strong corporate performance, buoyant external conditions and sustained ultra-loose monetary policy conditions,” the analyst said.

In September 2021, the number of unique issuers in the corporate and finance segments increased to 74 (69 in August 2021) and 65 (60), respectively. The corporate issuers mopped up ₹73,900 crore (₹60,100 crore) while the finance issuers raised ₹42,900 crore (₹1,07,700 crore).

While the money market rates have remained historically low as a result of favourable environment and assurance from the RBI regarding loose policy stance, Changulani underscored the modest hardening in rates that was visible in October 2021.

Ind-Ra believes a sustained rise in commodity prices worldwide and looming supply-side shortage in various spectrums could pose challenge to the short-term rates.

The report said corporates are emerging from the second wave of Covid-19 and are tapping the CP market positively in anticipation of higher working capital requirement, owing to the high commodity prices coupled with a recovery in capacity utilisation.

IPO financing

The agency underscored that the concentration of issuances in the seven-day bucket is largely due to the initial public offer (IPO) financing in the equity market. On the other hand, three-to-four-month bucket mirrors the nature and origination of fund flows to mutual funds.

Non-banking financial companies (NBFCs) have been gaining the advantage of the excess liquidity and a favourable environment for tapping CP markets to raise short-term debt for financing IPOs, Ind-Ra said.

The months of June, July and August 2021 witnessed heavy activities in the IPO market and many NBFCs were active in funding IPOs.

NBFCs raised ₹59,200 crore in June 2021, ₹1,41,200 crore in July 2021, and ₹1,07,700 crore in August 2021 via CPs.

The agency believes the RBI’s capping of individual borrower’s limit for NBFCs to ₹1 crore for IPO financing would affect the oversubscription of IPOs and reduce CP issuances.

Ind-Ra opined that the spread between banks’ marginal cost of funds-based lending rate and CP rate could remain wide. However, the shorter end of the market rate could start inching up in 3QFY22 based on the expectation (of unwinding ultra-loose monetary policy) from the RBI.

Nevertheless, the wide gap between CP rates and marginal cost of funds-based lending rate will remain a driving factor for more traction by the issuers to tap the CP market in the near to medium term, the agency said.

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India Ratings retains overall negative outlook for microfinance institutions, BFSI News, ET BFSI

Banking & Finance

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FILE PHOTO: A customer hands Indian currency notes to an attendant at a fuel station in Mumbai, India, August 13, 2018. REUTERS/Francis Mascarenhas

India Ratings and Research has maintained an overall negative outlook on the microfinance sector for the second half of the current financial year due to liquidity concerns in small and mid non-bank microfinance institutions, which could lead to a constraint in their disbursements.

The ratings agency retained a stable outlook for the large and strong sponsor-backed microfinance institutions, while small and mid non-bank microfinance institutions, including those with over 50% of assets under management in microfinance, were on a negative outlook rating.

Liquidity constraints of small and mid-sized companies could have a larger impact on Kerala and West Bengal, while harmonisation guidelines, government guaranteed loans, mechanism of Assam debt waiver and equity raise by some of these companies in the second half of the year could support sentiment in the near term.

According to the agency, microfinance institutions can be categorised as per their funding access. For most large companies, bank funding lines could continue and they may not face immediate liquidity stress. However, small and mid-size companies would need to conserve their liquidity, which could to a lag in their performance.

“The lower rated (BBB and below category) entities have witnessed a rising trend in incremental cost of borrowing which is not the case with large entities. If they are able to get a disproportionate share in government guarantee backed loans, it could help them in funding cost,” the agency said in its report.

Credit costs for microfinance institutions are likely to be in the range of 5%-10% this financial year, depending on their size and scale, access to liquidity, that is the ability to continue to disburse, and geographic concentration, the ratings agency said.

India Ratings also noted the recovery efforts taken by microfinance institutions. The collection efficiency improved over July-August 2021 from June 2021, given that around 70% of the borrowers were in the essential goods and services segments. The current collection efficiency at the end of June lagged behind March levels by 15%-20%, according to the agency.



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India Ratings maintains stable outlook on banking sector in FY22, BFSI News, ET BFSI

Banking & Finance

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Domestic rating agency India Ratings on Tuesday maintained a stable outlook on the banking sector for 2021-22 while it expects an increase in stressed assets in retail and MSME segments by end-March. It estimates gross non-performing assets (GNPA) of the banking sector to be at 8.6 per cent and stressed assets at 10.3 per cent for fiscal 2021-22.

“We have maintained a stable outlook on the overall banking sector for the rest of FY22, supported by the continuing systemic support that has helped manage the system-wide COVID-19 linked stress,” the rating agency said in its mid-year banks outlook released on Tuesday.

Banks will continue to strengthen their financials by raising capital and adding to provision buffers which have already seen a sharp increase in the last three to four years, it said.

The agency said its stable outlook on large private banks indicates their continued market share gains both in assets and liabilities, while competing intensely with public sector banks (PSBs). Most have strengthened their capital buffers and proactively managed their portfolio.

Outlook on PSBs takes into account continued government support through large capital infusions (Rs 2.8 lakh crore over FY18-FY21 and further Rs 0.2 lakh crore provisioned for FY22), it said.

The agency has a negative outlook on five banks (about 6.5 per cent of system deposits), driven primarily by weak capital buffers and continued pressure on franchise.

It estimates that the asset quality impact in the retail segment has been higher for private banks with a median rise of over 100 per cent in gross NPAs over Q1 FY21 to Q1 FY22 (about 45 per cent for PSBs).

“Banks have also undertaken restructuring in retail assets (including home loans), which could have postponed an immediate increase in slippages. Overall stressed assets (GNPA + restructured) in the segment is expected to increase to 5.8 per cent by end-FY22,” the report said.

It said the MSME sector has been under pressure with demonetisation, introduction of GST and RERA, slowing down of large corporates and now COVID-19.

However, the government has supported the segment by offering liquidity under the Emergency Credit Line Guarantee Scheme (ECLGS) and restructuring, it said adding that it expects that beginning Q3 FY22, a portion of such advances would start exiting moratoriums a part of which could slip.

GNPAs of MSMEs is expected to increase to 13.1 per cent by end-FY22 from 9.9 per cent in FY21. Stressed assets similarly would increase to 15.6 per cent from 11.7 per cent.

For corporate segment, the agency estimates GNPAs to increase to 10.2 per cent and stressed asset to increase to 11.3 per cent.

The rating agency has kept its FY22 credit growth estimates unchanged at 8.9 per cent for FY22, supported by a pick-up in economic activity post Q1 FY22, higher government spending especially on infrastructure and a revival in demand for retail loans.

Last week, the agency had changed the outlook to improving from stable for retail non-banking finance companies (NBFCs) and housing finance companies (HFCs) for the second half of FY22.

It said non-banks have adequate system liquidity (because of regulatory measures), sufficient capital buffers, stable margins due to low funding cost and on-balance sheet provisioning buffers.

These factors provide ‘enough cushion to navigate the challenges that may emanate from a subdued operating environment leading to an increase in asset quality challenges due to the second covid wave impacting disbursements and collections for non-banks’, it had said.



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Heightened stress in retail, MSME segments due to Covid could weigh down banks, cautions Ind-Ra

Banking & Finance

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India Ratings (Ind-Ra) has cautioned that heightened stress in retail and micro, small and medium enterprise (MSMEs) could push out the banking sector’s inflexion point.

The credit rating agency also said that upward movement in yield curve could weigh down banks’ profitability.

Ind-Ra observed that safe bastion retail lending has fallen as pandemic drives higher delinquencies.

Indian banks to feel the effect of Covid second wave long after infections fade: S&P Global

In the case of MSME, notwithstanding the support in the form of the emergency credit line guarantee scheme (ECLGS) and restructuring, slippages could reflect from 2HFY22.

The agency noted that the agriculture sector has seen limited impact of Covid. The incremental stress addition from corporate segment has been at low levels.

Continuing systemic support

Ind-Ra, however, has maintained a stable outlook on the overall banking sector for the rest of FY22, supported by the continuing systemic support that has helped manage the system-wide Covid-linked stress.

It observed that banks also continue to strengthen their financials by raising capital and adding to provision buffers, which have already seen a sharp increase in the last three to four years.

‘Significant impact on profitability of Indian banking system’

The agency, in its “Mid-Year Banks Outlook”, has kept its FY22 credit growth estimates unchanged at 8.9 per cent for FY22, supported by a pick-up in economic activity post 1QFY22, higher Government of India (GoI) spending, especially on infrastructure, and a revival in demand for retail loans.

For FY22, the agency estimates the banking sector’s gross non-performing assets (GNPAs) at 8.6 per cent (against 10.1 per cent forecast made in February 2021) and stressed assets at 10.3 per cent (11.7 per cent). It expects provisioning cost for FY22 to increase to 1.9 per cent from its earlier estimate of 1.5 per cent.

PvSBs: market share gains

“Ind-Ra’s Stable outlook on large private sector banks (PvSBs) indicates their continued market share gains, both in assets and liabilities, while competing intensely with public sector banks (PSBs).

“Most have strengthened their capital buffers and proactively managed their portfolio. As growth revives, large PvSBs are likely to benefit from credit migration due to their superior product and service proposition,”said Karan Gupta, Director.

The agency’s Stable outlook on PSBs takes into account continued government support through large capital infusions (₹2.8 lakh crore over FY18-FY21 and further ₹20,000 crore provisioned for FY22).

The government’s support to PSBs has resulted in a significant boost in their capital buffers over the minimum regulatory requirements, significant improvement in provision coverage to 68 per cent in FY21 (FY18: 49 per cent), overall systemic support resulting in lower-than-expected Covid stress and smooth amalgamation of PSBs, Gupta said.

As per Ind-Ra’s analysis of the impact of a reversal in the long-term yield curve on the investment portfolio of banks, it expects an adverse impact on the profitability with a 100 basis points upward shift in the yield curve.

This could impact the pre-provisioning operating profit of PSBs by 8 per cent and that of PvSBs by 3.2 per cent while for the overall banking system, the impact could be 5.8 per cent.

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Moody’s sees auto loan delinquencies rising for three to six months, BFSI News, ET BFSI

Banking & Finance

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Moody’s which reported stable collection rates for auto-loan asset-backed securities (ABS) rated by it in the quarter ended March 2021, sees them falling over the next three to six months.

The collection rates were similar to the pre-Covid levels in the March quarter, according to a report. Delinquency rates were also similar in the March quarter over the previous quarter.

The delay in the country’s economic recovery, rise in fuel prices is hurting the commercial vehicle segment. This will hit the performance of asset-backed securities backed by commercial vehicle loans, according to a report by Moody’s Investors Service earlier this month.

“Slowing economic activity in India due to the second wave will constrain commercial vehicle owners’ capacity to pay auto loans. As a result, commercial vehicle loan delinquencies will increase in India and collection rates will remain below March levels over the next three to six months,” according to Moody’s.

Sluggish economic activity will dampen demand for goods transportation and lower freight rates. This will reduce commercial vehicle operators’ incomes, and therefore, their ability to repay auto loans, the agency said.

Furthermore, fuel costs are rising following a depreciation of the rupee and state and central fuel tax changes, which have hiked up commercial vehicle operators’ costs and will further constrain their loan-repayment ability.

Cash reserves, excess spread and transaction structures will mitigate risks. The Indian asset-backed securities that Moody’s rates benefit from non-amortising cash reserves and substantial excess spread, providing liquidity and buffers against losses. Most deals also have timely interest and ultimate principal structures, which provide additional protection against liquidity risks.

Second wave harsh

The impact of the first Covid wave was cushioned with multiple measures such as regulatory moratorium, loan restructuring, additional funding through the emergency credit line guarantee scheme. Also, a sharp pent-up demand recovery raised optimism about faster-than-expected normalisation, according to India Ratings.

However, the outcome may be different during the second wave, due to the wide-scale impact, including rural areas and pent-up demand being absorbed already.

With reduced borrowers’ savings and rising operating costs due to fuel inflation, the excess capacity had its offsetting impact on freight contract renewals or market freight rates, all impacting borrowers’ cash flows.

Early demand indicators, such as the E-way bill, diesel consumption are showing signs of moderation and asset inflation (rising raw material prices like steel and cement) would impact demand offtake and thus load availability.

Thus, both demand and rising operating costs would moderate borrowers’ cash flows in the financial year 2021-22.

“Lenders’ collection efficiency would also be affected by restricted mobility as the second wave has spread across all geographies, the agency said, adding it has a negative outlook on commercial vehicle finance as an asset class.

There are emerging trends of rising loan tenures across vehicle financiers to reduce servicing burden for borrowers, however, these could lead to a rise in loss given defaults for collaterals.



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Ind-Ra, BFSI News, ET BFSI

Banking & Finance

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The Government’s plan to privatise two public lenders could lead to a material negative migration of long-term issuer ratings, as well as ratings on Tier-II instruments of the banks, specifically amongst the weaker non-consolidated ones, said India Ratings (Ind-Ra). The ratings agency said the government’s outline of privatising, rather than divesting, could translate to ceding both the majority shareholding as well as control over the banks – which have not been formally identified yet.

“The agency believes ceding of control should make the proposal attractive for potential investors and may make it more viable to attract a large quantum of capital that this exercise may require,” said Ind-Ra in its assessment.

The ratings agency said it had a long-term issuer rating floor of IND AA, for government majority owned banks, which factored along timely government intervention and thus, minimal default probability. Hybrid instruments, such as AT-1 instruments, were rated on their standalone profiles – which factored in ordinary support from the government, largely due to the terms of Hybrid instruments which could prevent government support. “Ind-Ra’s rating of AT1 instruments for weaker government banks could be multiple notches below the long-term issuer rating, factoring the inherent weakness of the institutions along with discretionary nature of the security which could impact its ability to service the instrument,” noted the agency.

Ind-Ra, citing the example of IDBI Bank, the only lender the government has thus far ceded majority control in, said it would as per its criteria place the ratings on a rating watch, and accordingly take rating calls based on the ‘final contours’ of the transaction.



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India Ratings revises outlook on overall banking sector to stable for FY22

Banking & Finance

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India Ratings and Research on Monday said it has revised its outlook on the overall banking sector to stable for 2021-22 from negative.

“This is because substantial systemic measures have reduced the system-wide Covid-19 linked stress below the expected levels. Banks have also strengthened their financials by raising capital and building provision buffers,” it said in a statement.

The agency has upgraded its credit growth estimates for the current fiscal to 6.9 per cent from 1.8 per cent and 8.9 per cent in the next fiscal. This is due to the improvement in the economic environment in the second half of the fiscal year and the Centre’s focus on higher spending especially on infrastructure.

India Ratings estimates gross non performing assets at 8.8 per cent in the current fiscal and 10.1 per cent next fiscal and stressed assets at 10.9 per cent.

Provisioning cost has fallen from its earlier estimate of 2.3 per cent for 2020-21 to 2.1 per cent (including Covid-19 linked provisions) and is estimated at 1.5 per cent for next fiscal.

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