Microfinance disbursements in the second quarter of the financial year spiked by 380% over the previous year, as normalcy crept in day-to-day life in urban & rural centres of the country following stringent lockdowns, revealed a report by CRIF.
Disbursements in rural centres increased from Rs 3,634 crore to Rs 17,407 crore between the two quarters, whilst urban centres disbursements stood at Rs 12,311 crore, from Rs 2,539 crore earlier. The figures however stood at a stark decline from the same period a year earlier, where disbursements stood at Rs 32,903 crore in rural parts and Rs 25,796 crore in urban parts, respectively.
The share of banks in disbursals between the first and second quarter of FY21 in disbursals decreased from 67.81% to 50.58%; whilst NBFC’s roared with their share increasing from 8.07% to 29.07%. Small Finance Banks (SFBs) also posted a lower share in disbursals from 20.08% to 12.84% between the first and second quarter of FY21.
The average ticket size in micro loans also grew quarterly by 1.4% to Rs 34700, whilst also posting a yearly growth of 6.7%. Movement was also noted in the ticket size, which in the first quarter of FY21 were focussed mainly on loan sizes of lower than Rs 20,000, occupying 60% of share, whilst in the second quarter was dominated by loans of more than Rs 40,000.
Geographically, the eastern region dominated the microfinance segment with a share of 34.7%, whilst southern and western parts held a share of 26.3% and 14.6%. The northern, central and north-eastern parts recorded a market share of 10.5%, 7.7% and 6.9%, respectively.
The average exposure per borrower increased by approximately 20% and 14% in West Bengal and Tamil Nadu, whilst also recording an increase of 12% in Karnataka. Separately, Tamil Nadu also had the highest share of borrowers, standing at 8.9%, of individuals who had loans with four or more lenders. Karnataka and Bihar retained second and third spots in individuals with four or more loans.
In the quarter-ended September 2020, the GNPA ratio of scheduled commercial banks improved to 7.7% against 9.3% in the year-ago period. India’s banking sector did see a decrease in its gross non-performing assets (GNPA) owing to the moratorium offered by the Reserve Bank of India (RBI) and due to recoveries and higher write-offs by the multiple banks.
State Bank of India has recoveries worth of Rs 4,038 crore and written off loans to the tune of Rs 5,617 crore. Likewise, ICICI Bank has recovered Rs 1,945 crore, written-off Rs2,469 crore.
Bank
Recoveries
SBI
Rs 4,038 cr
Bank of India
Rs 1,172 cr
Bank of Baroda
Rs 1,642 cr
ICICI Bank
Rs 1,945 cr
Yes Bank
Rs 1,000 cr
Bank
Write-off
SBI
Rs 5,617 cr
PNB
Rs 4,555 cr
BoB
Rs 2,553 cr
ICICI Bank
Rs 2,469 cr
Axis Bank
Rs 1,812 cr
On an overall basis public sector banks accounting for 75% share of GNPAs of SCBs (scheduled commercial banks) experienced a drop in the GNPA ratio to 9.3% in the Q2FY21 against 11.6% in Q2FY20 and 9.8% in Q3FY20.
However, CARE Ratings in its latest report stated that the GNPAs would have been around 0.5% to 0.6% higher had moratorium accounts been classified as NPAs.
Even RBI in it’s Financial Stability Report for July 2020 had warned that the asset quality of the financial system could deteriorate sharply, caused by the lockdown-induced disruptions to both supply- and demand-side factors.
Will lending improve in 2021? As per the RBI’s weekly bulletin, bank credit deployment has already started to witness a decline. The credit growth decelerated to 5.8% and 5.7% during the last two fortnights, compared to last year’s level of 8.0% and 7.9%, respectively (as of November 22, 2019 and December 06, 2019).
Banks have been very selective with their credit portfolios. Sectoral deployment of bank credit has witnessed a downward trend in some crucial industries and sectors. Growth in bank credit to NBFCs declined mainly because of the base effect and risk aversion in banking system due to the COVID-19 pandemic. As for MSMEs, they did secure loans but at higher rates.
In an interview to ET Now, Suresh Ganapathy of Macquarie said, “Bank credit growth continues to languish, with similar trends observed in the NBFC space. There has been a fall in consumption demand, especially in home loans, auto and service segments; and decline in industry credit, primarily on account of risk aversion on the part of banks to lend to MSMEs.”
CRISIL expects the bank credit growth to plummet to a multi-decadal low of 0-1%. Krishnan Sitaraman, senior director at CRISIL, told ETBFSI, “This crisis is unprecedented and so will its economic fallout be, such as lower capex demand as well as lower discretionary spends, to name some. This slowdown credit offtake is significant across segments in the current fiscal. The corporate loan portfolio, which constitutes almost half of total credit, is expected to be the worst-hit, and de-grow this fiscal.” Hence, if the denominator (credit) doesn’t grow the fresh slippages will add to the NPAs, and the GNPA ratio will increase.
There is an improvement in the economy. GST and GDP numbers have shown some growth. The banks are seeing a rise in the credit applications but they are cautious. B Ramesh Babu, MD & CEO, Karur Vysya Bank told ETBFSI, “No one wants to press an accelerator button right now. Because how is it going to pan out no one knows. The current growth is a short term or long term no one knows. So wait and watch mode is preferable.”
Real picture is still awaited The liquidity surplus in the banking system has increased in the week ended January 1, 2021 to Rs 6.21 lakh crore from Rs 5.09 lakh crore in the week ago period. As per RBI data, banks have maintained a liquidity surplus for the last 19 months. “This can be attributed to the inflow of bank deposits surpassing the outflow of bank credit. The incremental bank deposits (over March 20) have grown by 6.7% till December 18, 2020 as against the bank credit growth of 1.7%. With bank deposits outweighing bank credit flows, the banking system would continue to see a sizeable liquidity surplus in the current week, too,” said Kavita Chacko, Senior Economist with CARE Ratings.
The various liquidity infusion measures being undertaken by the RBI — OMO purchases and, the LTRO and TLTRO — have also added to the liquidity surplus.
Experts view that the performance of financial sector would remain under pressure on account of lack of credit uptake, risk aversion, lower fee income and covid-related provisioning. With the overhang of stressed assets continuing, banks will continue to focus on improving their collection efficiency and an immediate turnaround in lending activity seems unlikely.
Smaller and mid-sized entities with an AUM of under Rs 20,000 crore expect higher growth rate compared to their larger peers.
Growth in non-banking financial companies’ (NBFC) assets under management (AUM) is likely to recover to about 7-9% in FY22 from a flattish performance in FY21, rating agency Icra said on Wednesday. In order to achieve this rate of growth, they will have to raise Rs 1.9-2.2 lakh crore, in addition to refinancing existing lines. The rating agency carried out a survey across non-banks, involving about 60 entities, together accounting for over 50% of the sectoral AUM and about 23 investors. The survey revealed that more housing finance companies (HFCs) expect growth of over 10% as compared to NBFCs. Also, smaller and mid-sized entities with an AUM of under Rs 20,000 crore expect higher growth rate compared to their larger peers. However, investors have a relatively muted growth outlook.
A M Karthik, vice president and sector head – financial sector ratings, Icra, said that growth in FY22 is likely to be driven by the improvement in demand from all the key target segments. Some of the key segments which would bolster growth include gold loans, home loans, personal credit, rural finance and microfinance. Growth in the vehicle finance and business loans segments, which are closely linked to economic activity, are expected to take longer to register a reasonable revival.
Non-bank exposures to commercial real estate and other large corporate or wholesale exposures are expected to register a decline even in FY22 after the decline of about 15% in FY20 and a 10% expected contraction in FY21. “As per the survey, majority (~70%) of issuers and investors do not expect co-lending to account for less than 10% of non-bank AUM over the next two-three years. Access to adequate funding, therefore, would remain critical for the sector to register a sustained improvement in growth,” Karthik said.
Growth would be contingent upon the access to adequate funding lines. Incremental bank loans to non-banks, considering their high sectoral exposure to the NBFC segment, remains to be seen and would, in turn, depend on overall bank credit growth. Mutual funds registered some improvement in their exposures to non-banks over the recent past, but their sustainability will be critical. An expected improvement in securitisation volumes in FY22 after the sharp contraction in FY21 and access to funding from other sources, including retail or overseas lenders or investors, would be key for sustainable growth.
Icra expects the slippages from the restructured book (estimated at 4-6% of AUM) to keep NBFC non-performing assets (NPAs) at elevated levels even in FY22 after an increase of up to 200 basis points (bps) in FY21. This is after considering that entities, especially those having retail exposures, would prefer to write off sticky overdues, in view of the provision build-up, adequate earning performance and their comfortable capital structures. Collection efficiency, notwithstanding the improvement since April 2020, remains about 5-15% lower than pre-Covid levels, thereby exerting pressure on their current asset quality.
“While part of the stress could get restructured, slippages would increase in H2FY21. As per the survey, ~90% of the investors expect the NPAs to increase by about 100-200 bps by March 2021 vis-a-vis 40% of the issuers. Further, another 40% of the issuers expect the NPAs to remain stable vis-a-vis March 2020 levels,” Icra said.
Lendingkart, a digital lending fintech start-up in working capital space, plans to launch ‘credit intelligence services’ for banks from April, helping them evaluate credit worthiness of self-employed small- and micro-enterprises based on their cash flows, said its co-founder and Managing Director, Harshvardhan Lunia.
Lendingkart will assign a probability of default score, give out a risk premium and suggest the amount that banks could lend to such small and micro enterprises, especially those in Tier-2 and Tier-3 cities, Lunia told BusinessLine.
Banks could always go with their own underwriting model and use the score provided by Lendingkart as an additional tool to evaluate the borrower, he said.
Lendingkart is the only fintech in the country that has built an algorithm-based and cash flow based decision engine, he said.
The use of the cash flow based decision engine would obviate the need for institutions and banks to rely on financial statements and income tax returns (ITRs) to evaluate a borrower.
As the year draws to an end here’s a look at what shaped the BFSI sector in the year gone by:
RBI vs. Covid-19: The Reserve Bank of India came out with a slew of measures to safeguard the financial services sector and the overall economy against the virus triggered pandemic and the lockdowns.
Shaktikanta Das, RBI Governor, during one of his monetary policy announcements.
Since March, the RBI cut the repo rate by 115 basis points to 4%. It also purchased Rs 1.9 lakh crore of G-secs until September. These measures helped in reducing the interest rates in money and debt markets, and even got transmitted to bank lending rates. RBI also maintained an accommodative monetary policy stance, suggesting it could cut rates to inject money into the financial system whenever needed.
Moreover, the regulator provided instant relief to borrowers by wavering off EMIs on term loans for six months — March to August.
Bidding farewell: State Bank of India’s chairman Rajnish Kumar hung up his boots in 2020, after serving the bank in various capacities for almost 40 years, and the last three as its chairman. Kumar is credited with launching SBI’s digital platform YONO, whose valuation he’d estimated to be around $40 billion. Kumar’s vision for the bank was to transform it into a strong bank and at the top of the digital game. And he definitely succeeded at that. In October he was replaced by Dinesh Kumar Khara, previously a Managing Director at SBI.
Rajnish Kumar, Former Chairman, State Bank of India and Aditya Puri, Former MD & CEO, HDFC Bank
Aditya Puri, who was at the helm of HDFC Bank for 26 years, also retired in October to give way to Sashidhar Jagdishan. Puri was at Citi Bank when Deepak Parekh first offered him the job to pilot the newly formed HDFC Bank. Puri, a Chartered Accountant, became the first CEO of HDFC Bank in 1994. And in the past quarter century, he transformed the bank and made it the largest private sector lender of India. Puri is now a Senior Advisor at The Carlyle Group.
Failed banks: In March, RBI placed YES Bank under moratorium and restricted withdrawals to a maximum of Rs 50,000, sending its customers to a frenzy. Shares of the bank tanked to Rs 5.65 a piece, its lowest till date.
Yes Bank customers queue up to withdraw money when the bank was put under moratorium by the regulator
The bank ran into trouble following the RBI’s asset quality reviews in 2017 and 2018, which led to a sharp increase in its NPA ratio and significant governance lapses that led to a complete change of management. The bank subsequently struggled to address its capitalisation issues and get investors. Later, the bank was rescued by State Bank of India (SBI), six private sector banks, and a mortgage lender, who invested a total of Rs 10,000 crore the bank, helping it shore up its capital buffers after they dropped below the regulatory requirements. SBI’s then CFO Prashant Kumar was chosen to head the struggling lender.
Another bank that made headlines is Lakshmi Vilas Bank. In September, in an unprecedented move, shareholders voted against the seven out of a total of 11 members from the senior management including the interim MD & CEO, S, Sundar. According to reports the shareholders were unhappy with the rise in bad loans, value erosion and the future of the bank. The RBI then appointed three members to look after the daily affairs of the bank along with the remaining four senior officials of the bank.
The capital starved LVB was looking for potential mergers and began talks with IndiaBulls Housing Finance, but couldn’t get a nod from the RBI. Later this year, LVB announced merger talks with Clix Capital. But before anything could materialise, RBI put it under moratorium and later announced its merger with DBS Bank India.
Coronavirus health insurance policies : On the basis of guidelines issued by the Insurance Regulatory and Development Authority of India (IRDAI), most insurance companies rolled out their Corona Kavach and Corona Rakshak policies. These short-term policies will cover the treatment cost of the coronavirus disease and remain valid until March 31, 2021. The Corona Kavach policy will cover both individuals and families. The Corona Rakshak policy will only cover individuals.
IRDAI had asked insurers to roll out Covid-19 specific policies Corona Rakshak & Corona Kavach. Industry experts believe many first time buyers have purchased these policies and the sale of these policies has been good.
Above all, the industry accelerated digital adoption, leaving behind the face-to-face service, a dominant mode of distribution and business acquisition. Agents and distributors now interact with customers on video calls for selling products and customer engagement.
The awareness for insurance has gone up significantly towards the concept of protection, the primary reason why insurance exist. Industry experts believe this momentum is here to stay. Further, the industry is moving towards rolling out standardised insurance products like Aarogya Sanjeevani for health insurance, the regulator has also pushed for standardised term cover and travel insurance.
NBFC vs liquidity: NBFCs continued to struggle with liquidity and credit flow. They faced a dual challenge of growth and profitability. The percentage of customers availing the moratorium was relatively lower for NBFCs, while loans outstanding under moratorium were higher than those extended by banks, indicative of incipient stress, said a latest report by RBI. Moreover, the asset quality deteriorated as slippages rose in FY20. However, efforts were made by NBFCs to clean up their balance sheets, as reflected in their written-off and recovery ratios.
Meanwhile, amidst pervasive risk aversion, bank borrowings by NBFCs continued to grow at a robust pace as compared to market borrowings. As the RBI required NBFCs to adopt a Liquidity Risk Management Framework from December 2020, NBFCs gradually swapped their short-term borrowings for long-term borrowings with the aim of maintaining adequate liquidity.
RBI’s NUE: RBI took a leap towards establishing a new umbrella entity (NUE) for retail payments. This entity will set up, manage, and operate new payment systems in the retail space. It is tasked with operating payment systems such as ATMs, white-label PoS, Aadhaar-based payments, and remittance services. All NUEs will have to be interoperable with the National Payments Corporation of India (NPCI)— the umbrella entity that currently manages retail payments in India. However, they will be allowed to set themselves up as for-profit or not-for profit entities. Some big names are already in fray for licence.
Non-banking finance companies sector remains resilient with strong capital buffers and their balancesheet growth gained traction in the first half of 2020-21, said a report by the Reserve Bank of India.
“The consolidated balance sheet of NBFCs decelerated in 2019-20 due to stagnant growth in loans and advances beset with a challenging macroeconomic environment and weak demand compounded by risk aversion. In H1:2020-21, however, balance sheet growth of NBFCs gained traction. Although asset quality deteriorated marginally, the NBFC sector remains resilient with strong capital buffers,” said the RBI report.
As on September end 2020, the total liabilities or assets of NBFCs stood at ₹35,85,854 crore compared to ₹33,89,267 crore compared to end March 2020.
“…in 2020-21 (up to September), balance sheet growth of NBFCs, especially that of NBFCs-ND-SI (non-deposit taking systemically important NBFCs), gained traction due to pick-up in loans and advances and base effect,” the report said.
The report further noted that the impact was relatively higher on NBFCs since they were unable to function during the initial phase of lockdown.
“After the IL&FS episode, the NBFC sector was inching towards normalcy in 2019- 20 when Covid-19 affected their operations,” it further said.
About 26.6 per cent of the total customers of NBFCs availed the loan moratorium as on August 31, 2020 with MSMEs availing of the scheme the most.
The report also warned that due to the economic damage inflicted by Covid-19 across segments, the asset quality of NBFCs may worsen even in the retail loans category, which is generally considered a safe haven with the lowest share of stressed assets.
Housing finance companies
Similarly, housing finance companies also faced challenges due to Covid-19, which could lead to slippages and higher provisioning.
“HFCs faced challenges due to delays in completion of housing projects, cost overruns due to uncertainty around reverse-migration of labourers and delayed investments by buyers in the affordable housing sector as incomes shrank and jobs were lost. Going forward, the sector may need to brace up for large slippages of loan assets and higher provisioning,” the report said.
As the risk profile of NBFCs is changing at a fast pace, there was a need for a regulatory framework for dividend declaration.
RBI’s latest draft on the declaration of dividends by non-banking financial companies (NBFCs) may help them in strengthening their balance sheet by improving leverage ratios and creating a buffer and surplus for fresh lending. RBI’s move will also help NBFCs in creating better provisioning against the delinquent assets, said a report by India Ratings. As the risk profile of NBFCs is changing at a fast pace, there was a need for a regulatory framework for dividend declaration, the report added. The draft circular said that non-deposit and systemically-important NBFCs with capital-to-risk weighted assets ratio (CRAR) below 15 per cent and net NPAs above 6 per cent will not be able to pay any dividend.
NBFCs emerged as a crucial segment during the pandemic as demand for credit has substantially increased in NBFCs. In order to infuse greater transparency and uniformity in practice, it has been decided to prescribe guidelines on the distribution of dividends by NBFCs, RBI said.
However, the RBI draft circular does not commensurate with the guidelines issued by the Department of Investment and Public Asset Management (DIPAM) on dividend payments. According to DIPAM, PSUs are required to pay a minimum annual dividend of 30 per cent of profit after tax or 5 per cent of net worth, whichever is higher. The rating agency further said that this anomaly will have to be resolved and either the RBI will modify its draft circular or come up with a special provision for the government-owned NBFCs, or DIPAM will have to revisit their guidelines for dividend payments.
Meanwhile, it is believed that draft provisions on dividend payments will nudge NBFCs to accelerate the resolution of their stressed assets, otherwise their dividend payments will remain constrained. The NBFCs have received various support as India struggled through the coronavirus pandemic. From TLTRO 2.0 to additional liquidity, the NBFCs have been at the centre of government policies in recent months.
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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