Concerns on retail loan asset quality re-emerge as Covid curbs intensify

NEW DELHI:  As the second wave burns through the country and lockdowns intensify, non-banking financial companies (NBFCs) and housing finance companies (HFCs) could see a re-emergence of stress in retail loans much like what was witnessed last summer, according to analysts.

The restrictions on movement, for instance, would have a bearing on the collection efforts of NBFCs, especially for microfinance loans, where cash collections still remain dominant. “Post the nationwide lockdown last year, we had witnessed a severe drop in collections for most asset classes though the availability of a moratorium provided a breather from an NPA-recognition perspective.

Early signs reflect that securitisation volumes in Q1FY22 would remain muted,” said Abhishek Dafria, Vice President and Head-Structured Finance Ratings, ICRA. Microfinance and unsecured SME loan pools had reported the highest delinquencies last year post the end of the moratorium period, followed by vehicle  and housing loans, or loan against property.

“In our view, the risk categorization would remain similar in the current environment but the geographical concentration of pools to regions where Covid cases are relatively higher and, thus government restrictions are severe, would matter more from a risk perspective,” Dafria added. Securitisation of microfinance and SME loans had seen a 70 per cent year-on-year decline in fiscal year 2020-21.

Analysts at Nomura also expect forbearance for these loans to be extended which will help asset quality. ICRA added that commercial vehicle loans could also face stress if inter-state restrictions are re-imposed, though even the current partial restrictions would lead to lower fleet utilisation. Housing loans are expected to remain most resilient.