The economic slowdown accentuated by the pandemic, the spread of the virus, and the intermittent lockdowns enforced by the authorities is expected to put pressure on the asset quality of the shadow banking sector. Rating agency Crisil has estimated that delinquencies of the sector may shoot up as much as 50-250 basis points in the current fiscal year, depending on the segment of operation, due to vulnerability in borrower cash flows.
However, the one-time loan restructuring announced by the Reserve Bank of India (RBI), will somewhat restrict a huge rise in the reported gross non-performing assets (GNPA), but the underlying challenges will continue.
While collection efficiency has improved significantly since the initial days of the pandemic-induced lockdown, there is still some way to go before reaching pre-pandemic levels. As the moratorium offered by RBI came to an end in August, going ahead, managing collections will be of crucial importance for NBFCs.
“Moratorium uptake was higher in April and May, while collections were slack with a stringent lockdown in place. Though collections have improved since June as the economy began opening up, the pace of improvement and extent of ultimate credit losses will be the key monitorables going forward”, CRISIL said in its note.
“While there has been an improvement across segments over the past four months, collections in the wholesale, MSME, and unsecured segments are still much lower than before the pandemic,” said Krishnan Sitaraman, Senior Director, Crisil Ratings.
Among various asset classes, the home loan segment will be relatively better off than other segments. The rating agency expects delinquencies in home loans to rise 30-50 bps for salaried professionals and about 150 bps for self-employed/ affordable housing segments this fiscal.
The vehicle finance segment is expected to see a steep rise in delinquencies as asset quality in this segment is dependent on improvement in macroeconomic environment as commercial vehicles constitute bulk of the portfolio.
“The restructuring scheme for MSME borrowers and personal loans announced by the RBI may now limit the rise in NPAs in these segments. Nevertheless, NBFCs are expected to be prudent in offering restructuring selectively to deserving accounts and not in a blanket manner,” the rating agency said.
Furthermore, it said that NBFCs have to create capital buffers for asset-side risks. Many have engaged in the capital raising process and bolstered their capital base but the one’s with weak capital buffers will see their credit profiles being impacted.
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