AgenciesMumbai: Most of the non banking lenders have seen their performance improving but the turbulence would continue for some more time even as the higher provisioning is set to help the sector, an ICRA report has said.
Non-banks (NBFC [excluding infra NBFCs] and HFCs) have witnessed a good improvement in the collection efficiencies (CE) since September 2020 after post Covid-19 disruptions in Q1. The credit profile is supported by a steady improvement in credit provisions over the last few quarters; and moderately reduced its NPA/Gross Stage3 (GS3) assets in the quarter ended September 2020. Asset quality indicators are supported by limited forward flow into harder delinquency buckets because of the prolonged moratorium coupled with some collections from overdue accounts.
Provisioning for NBFCs is even higher than most banks. This is mainly because NBFCs follow Indian Accounting Standards or Ind-As and will have to provide for all the potential bad loans even if it’s way above what the central bank has prescribed. Under Ind-AS, auditors are required to make a judgment call on each loan portfolio even if the borrower is not a defaulter, and decide how much has to be provisioned.
This also means that as the pressure eases they could have more money being pumped in the system. NBFCs had to provide a large chunk of money for hospitality, aviation and infrastructure companies. In many cases the NBFCs have now discovered that some of these companies will be able to weather the storm till December. This would mean that they can reduce the provisioning which would bring the extra cash back in the system.
“Currently, non-banks are having 50% higher provisions, at about 3.1% of their assets under management (AUM) compared to about 2.0%, a year ago (Sept’19). Higher provisions will allow them to absorb near-term uncertainties to some extent,” A M Karthik, Vice President and Sector-Head Financial Sector Ratings, ICRA said.
The industry’s outlook continues to remain negative. “The performance of non-banks needs to be observed closely, given its close economic linkages. With the pandemic affected operating environment yet to recover fully, lenders may face increased delinquency levels, although currently the same is lower than the previous ICRA estimates. The provision build-up and improved capital profile over the recent past however would provide risk cushion to an extent,” said Karthik.
Non-banks (NBFC [excluding infra NBFCs] and HFCs) have witnessed a good improvement in the collection efficiencies (CE) since September 2020 after post Covid-19 disruptions in Q1. The credit profile is supported by a steady improvement in credit provisions over the last few quarters; and moderately reduced its NPA/Gross Stage3 (GS3) assets in the quarter ended September 2020. Asset quality indicators are supported by limited forward flow into harder delinquency buckets because of the prolonged moratorium coupled with some collections from overdue accounts.
Provisioning for NBFCs is even higher than most banks. This is mainly because NBFCs follow Indian Accounting Standards or Ind-As and will have to provide for all the potential bad loans even if it’s way above what the central bank has prescribed. Under Ind-AS, auditors are required to make a judgment call on each loan portfolio even if the borrower is not a defaulter, and decide how much has to be provisioned.
This also means that as the pressure eases they could have more money being pumped in the system. NBFCs had to provide a large chunk of money for hospitality, aviation and infrastructure companies. In many cases the NBFCs have now discovered that some of these companies will be able to weather the storm till December. This would mean that they can reduce the provisioning which would bring the extra cash back in the system.
“Currently, non-banks are having 50% higher provisions, at about 3.1% of their assets under management (AUM) compared to about 2.0%, a year ago (Sept’19). Higher provisions will allow them to absorb near-term uncertainties to some extent,” A M Karthik, Vice President and Sector-Head Financial Sector Ratings, ICRA said.
The industry’s outlook continues to remain negative. “The performance of non-banks needs to be observed closely, given its close economic linkages. With the pandemic affected operating environment yet to recover fully, lenders may face increased delinquency levels, although currently the same is lower than the previous ICRA estimates. The provision build-up and improved capital profile over the recent past however would provide risk cushion to an extent,” said Karthik.
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