Tag: India Ratings and Research

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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Ind-Ra, BFSI News, ET BFSI

Personal Finance

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The imposition of stricter measures on mobility across states in the wake of the second wave of COVID-19, India Ratings and Research (Ind-Ra) had opined in May 2021 that the overall microfinance sector’s collections could lead to a drop by a cumulative 10%-15% during the month compared to March 2021.

However, the collection lag in the second half of May 2021 was more severe than the agency’s initial estimates, and hence, collections during the month were down by 60%-70% for many microfinance institutions (MFIs). Accordingly, Ind-Ra has revised the MFI sector’s credit cost estimate range for FY22 to 5%-10% from 3%-6%, depending on the geographies of operations/concentration.

Nevertheless, Ind-Ra believes that most of the large MFIs rated by the agency would be able to absorb this through their income statement, with minimal impact on equity. The difference in the performance of the companies operating in this sector will be based on the funding available to them. Ind-Ra believes that larger MFIs with a diverse customer base are better placed to raise funding at competitive costs, and hence, reiterates its Stable Outlook for large and group-owned MFIs and a Negative Outlook for the rest for FY22.

During June 2021, with the lifting of restrictions in the first half of the month in the northern and western states of India, there was a modest improvement in the collection efficiencies of those regions. In the southern states, however, the restrictions began to ease very slowly only towards the second half of June 2021. In fact, the daily number of COVID-19 cases in Kerala is on an increasing trend again.

Overall, for a diversified portfolio, the collections in June 2021 are likely to have been higher by 5%-10% compared to May 2021. The restrictions continue to be tighter in the states of Kerala and Tamil Nadu due to slow control over COVID-19 cases. Against this backdrop, Ind-Ra expects south India-based MFIs (including small finance banks) to witness larger shortfalls in collections in 1QFY22 compared to those operating in other regions.

Ind-Ra expects the collection efficiency trends to improve over July-August 2021 compared to June 2021, given that around 70% of the borrowers of most MFIs are in the essential goods and services segments, and also taking into consideration the trends witnessed during the first wave of COVID-19. That being said, the variations in the performance of MFIs could be wider, depending on their level of concentration in regions where the lifting of restrictions could be slow.

As far as fresh disbursements are concerned, MFIs significantly curtailed their disbursements during April-May 2021 and the initial two weeks of June 2021. However, Ind-Ra’s discussions with MFIs suggest that the operations are gradually picking up on the back of improved mobility, with the staff slowly regaining the confidence to venture into the field. This by itself would aid the recovery efforts for MFIs.



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Moratorium likely to raise banks’ losses from unsecured loans, BFSI News, ET BFSI

Banking & Finance

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With deteriorating financial conditions of borrowers, the performance of unsecured assets classes, including microfinance loans and unsecured business loans, is worsening.

“The performance of unsecured asset classes, such as microfinance loans, unsecured business loans and consumer loans, is worsening, given the borrower’s depleted financial cushions and the nature of these loans,” according to a report by India Ratings and Research.

The Reserve Bank of India‘s moratorium on repayment of loans has delayed the stress in these segments where delinquencies have not yet stabilised and higher loan losses are expected to materialise in FY22, it said.

Secured asset classes

For secured asset classes, the agency said, it has a stable performance outlook given the recovery in the economy in FY22.

The agency noted that vehicle loans — including loans for commercial vehicles, passenger vehicles and two-wheelers — have a stable asset performance outlook, given the pickup in economic activities witnessed in the second half of FY21.

“Secured business loans (principally loans against property) also has a stable asset performance outlook, due to the borrower’s higher propensity to repay,” the report said.

Digitisation

As per the report, digitisation initiatives are also expected to help with better portfolio monitoring and in reducing soft delinquencies. “The focus has shifted to building quality secured loan portfolios, upping process efficiency and automating customer follow-ups”.

It noted that recovery momentum and continued policy support in FY22 will be key for loan performance.

Indian securitisation transactions predominantly involve asset classes where the borrowers are either small and micro enterprises/ businesses, or belonging to low and middle-income households, it said.

Varied behaviour

Small business loans are expected to witness differentiated performances depending on the loan type, it said.

The report also said the severity of the impact of the pandemic on their income as well as the impact of the moratorium and fiscal measures on their credit behaviour is varied.

“Thus, the effectiveness and inclusiveness of government support schemes to improve the financial position of the end-borrowers is crucial and is a key monitorable,” it said.



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Ind-Ra revises banking sector outlook for FY22 to Stable

Banking & Finance

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India Ratings and Research (Ind-Ra) has revised its outlook on the overall banking sector to stable for FY22 from negative.

The credit rating agency estimated that overall stressed assets (gross non-performing assets/GNPA + restructured) could increase 30 per cent for the banking system, with the increase being almost 1.7 times in the retail segment in the second half (October 2020 till March-end 2021) FY21.

Also read: States’ fiscal deficit to moderate to 4.3% of GDP in FY22: India Ratings & Research

The agency estimates gross non-performing assets (GNPAs) at 8.8 per cent in FY21 (FY22: 10.1 per cent) and stressed assets at 10.9 per cent (11.7 per cent).

Along with revision in outlook, Ind-Ra has upgraded its FY21 credit growth estimates to 6.9 per cent from 1.8 per cent and 8.9 per cent in FY22, with the improvement in the economic environment in 2H FY21 and the government of India’s (GoI) focus on higher spending, especially on infrastructure.

Referring to the revision in outlook, Ind-Ra observed that the substantial systemic measures have brought the system-wide Covid-19-linked stress to below expected levels.

Further, banks have also strengthened their financials by raising capital and building provision buffers.

According to its assessment, provisioning cost has fallen from the earlier estimate of 2.3 per cent for FY21 to 2.1 per cent (including Covid-19-linked provisions); it is estimated at 1.5 per cent for FY22.

Outlook for PSBs

Ind-Ra

revised the outlook on public sector banks (PSBs) to Stable for FY22 from Negative.

The agency reasoned that regulatory changes led to an improvement in the ability of PSBs to raise Additional Tier (AT) I capital, a high provision cover on legacy NPAs, overall systemic support resulting in lower-than-expected Covid-19 stress, and minimal surprises arising out of amalgamation of PSBs.

Also, the fact that the GoI has earmarked ₹34,500 crore for infusion in PSBs in 4Q (January-March) FY21d should suffice for their near-term growth needs.

Outlook for private banks

Ind-Ra

said the outlook remains Stable for private banks, which continue to gain market share, both in assets and liabilities, while competing intensely with PSBs.

“Most have strengthened their capital buffers and proactively managed their portfolios. As growth revives, large private banks would benefit from credit migration due to their superior product and service proposition,” the agency said in a note.

Stressed assets

According to Ind-Ra’s estimates, stressed assets will rise 30 per cent in 2HFY21 and 8 per cent in FY22.

The agency estimates that about 1.24 per cent of the total bank book is under incremental proforma NPA and about 1.75 per cent of the total book could be restructured by end-FY21.

“As a conservative measure, the agency has not adjusted for overlaps between those categories. This is the incremental stress purely on account of the Covid-19 pandemic and does not include the slippages that banks would witness in the normal course of business,” said the note.

Also read: Lenders remain risk averse to additional lending or alter lending terms: Ind-Ra

Ind-Ra estimated the stock of stressed retail assets for PSBs could increase to 2.9 per cent in FY22 from 2.1 per cent in FY21, while it could increase from 1.2 per cent to 4.3 per cent for private banks.

Provisions

Excluding Covid-19-linked stress, Ind-Ra expects the provision coverage ratio (excluding technical write-offs) for both PSBs and private banks to reach 75 per cent-80 per cent by end-FY21.

“If we consider the provision on proforma gross NPAs (still not considering Covid-19 provisions), the resultant provision cover could be about 70 per cent at end-FY21 and FY22, while the historic slippage rate will continue and banks would still have Covid-19 provisions as buffers.

“PSBs have 0.2 per cent-0.5 per cent provisions while private banks have 1 per cent-2 per cent Covid-19 provisions, most of which is unutilised,” the agency said.

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Ind-Ra, BFSI News, ET BFSI

Banking & Finance

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India Ratings and Research (Ind-Ra) has revised its outlook on the overall banking sector to stable for FY22 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.

“Ind-Ra has upgraded its FY21 credit growth estimates to 6.9% from 1.8% and 8.9% in FY22, with the improvement in the economic environment in 2HFY21 and the government focus on higher spending especially on infrastructure. We estimate GNPA at 8.8% in FY21 (FY22: 10.1%) and stressed assets at 10.9% (11.7%). Provisioning cost has fallen from its earlier estimate of 2.3% for FY21 to 2.1%” said the agency in its report.

Key Findings

Private Sector Banks

  • The regulatory changes led to an improvement in public sector banks’ (PSBs) ability to raise AT I capital, a high provision cover on legacy NPAs, overall systemic support resulting in lower-than-expected COVID-19 stress.
  • Private Banks continue to gain market share both in assets and liabilities, while competing intensely with PSBs. Most have strengthened their capital buffers and proactively managed their portfolio.

Stressed Assets

  • Ind-Ra estimates that about 1.24% of the total bank book is under incremental proforma NPA and about 1.75% of the total book could be restructured by end-FY21.
  • Ind-Ra estimates that overall stressed assets (GNPA + restructured) could increase 30% for the banking system, the increase is almost 1.7x in the retail segment in 2HFY21.
  • The stock of stressed retail assets for PSBs could increase to 2.9% in FY22 from 2.1% in FY21, while it could increase from 1.2% to 4.3% for Pvt Banks.
  • Ind-Ra has assessed that stressed corporate assets as a percentage of gross bank credit declined to 15.3% at end-1HFY21 from 15.7% at end-FY20 (FY19: 17.2%, 1HFY19: 19.3%, FY18: 20.2%).

Provision Coverage Ratio

  • Excluding COVID-19 linked stress, Ind-Ra expects the provision coverage ratio (excluding technical write-offs) for both PSBs and Pvt Banks to reach 75%-80% by end-FY21.
  • The resultant provision cover is expected to be about 70% at end-FY21 and FY22, while the historic slippage rate will continue.
  • PSBs have 0.2%-0.5% provisions while Pvt Banks have 1%-2% covid provisions, most of which is unutilised.

The report further mentioned, “Under the Emergency Credit Line Guarantee Scheme, the GoI provided a guarantee to banks and NBFCs for extending funds to stressed MSMEs. Based on the progress seen till 25 January 2021, the funds sanctioned by banks under the scheme has totalled to INR1.98 trillion.” While Pvt Banks have been more adept at underwriting risk in the segment, they also have a higher share of unsecured retail assets where the borrowers have faced a disproportionate impact on their ability to service loans.

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