ICRA Opines That Corona Virus Lock Down Will Come Down Hard On NBFCs

The 21-day lockdown across the country is set to hit non-banking financial companies (NBFCs) hard as small business owners and low-income households find it hard to service their loans. NBFC loans in the affordable housing, small and medium enterprises (SMEs), loan against property (LAP), real estate and microfinance (MFI) segments are likely to be affected the most, rating agency Icra said on Thursday.

FE had reported on Thursday that repayments have already begun to dry up in customer segments where loans are serviced in cash, such as by owners of some commercial vehicles. NBFCs largely cater to the self-employed borrower segment in the retail space, where the cash flows are expected to be more volatile in the current situation compared to their salaried counterparts, Icra said. Other non-retail exposures of NBFCs are to SMEs with relatively moderate risk profiles, which accentuates their credit risk in the current scenario. “Further, most of these borrowers have limited funding avenues and typically don’t have banking relationships for their credit requirements. Non-banks, which are already facing funding constraints and an expected increase in delinquencies, are likely to focus more on collections at least in the near term,” Icra analysts said in a report.

Stating that the affordable housing loans where the borrowers have limited ability to absorb major financial shocks, the report observed that such loans are more likely to come under pressure. However, a significant impact is likely to be visible only from April 2020, given that collections for March 2020 would have largely happened in the initial ten days of month, when the lockdown was not in place.

As for the already-stressed SMEs, a fall in the income levels for a prolonged period could adversely impact the borrower’s debt-servicing capability. Thus, the asset quality issues are expected to aggravate further in March 2020 and would remain an overhang on the segmental performance in the near to medium term.

In the corporate category, loan to real estate developers could come under stress as new home sales are likely to slow down, with buyers delaying their purchase decisions. “Labour migration and lockdowns will also delay project execution, completion and sales, which would further impact the cash flow of this borrower segment. With tougher refinancing conditions, this segment would face higher delinquencies and loan losses,” Icra said.

While MFIs have largely moved to cashless disbursements, collections continue to be made mostly through cash, which would be impacted by the limits imposed because of Covid-19. “Some parts of the country like Assam, parts of Karnataka, Maharashtra, etc, are already facing higher delinquencies because of political or adverse weather conditions. The current scenario would compound the effect and others depending on the extent of the restrictions imposed,” the report said, adding that the fear of non-availability of fresh sanctions from MFIs could also slow repayments and prepayments, which would otherwise have been received by the MFIs.

(Source: Financial Express)