NBFC bad debts set to double in the face of Covid: study
Mumbai: Finance companies lending to commercial vehicles, businesses and microfinance recorded lowest liquidity coverage rate, according to ICRA. The rating agency planned that the doubtful debts – non-productive assets, Where APM – of non-bank financial corporations (NBFC) could double in March 2020 due to the Covid-19 crisis. Housing finance companies (HFC) do better with a shorter moratorium, which helps their cash flow.
What impacts the cash flows of non-banks is the moratorium, which has led to a drop in liquidity. About 52% of the NBFC portfolio is under moratorium, while in the case of HFCs it is only 28%.
Assuming a 5-10% slip of the assets under management (AT M) while in moratorium, non-bank NPAs could increase to 5 to 7% by March 2021 against 3.3 to 3.4% in March 2020. The quality of the NBFC’s assets will probably be more affected than HFCs , the sectoral NPA reaching 7 to 9.5% by March 2021. HFCs, on the other hand, could experience NPAs of 3.4 to 4.8%.
“The portfolio under moratorium for some large NBFCs is 70-80%, with an industry average of around 52%, while for HFCs the average is around 28%. The additional provision related to Covid-19 carried by NBFCs is around 0.7% (of AUM), while for HFCs it is around 0.2%. The expected sharp increase in the post-moratorium window for phase 3 assets and weak economic indicators would encourage entities to further revise their expected credit loss models and increase provisions, which would have an impact on their profits ”, said ICRA Vice President and Sector Head (Financial Sector Ratings) AM Karthik.
Currently, funding through the banking channel is the main source, with the share of direct lending from banks rising to around 31% of total non-bank borrowing in March 2020, up from around 28% in March 2019. Bank borrowings from larger entities (direct / indirect) could impact the flow of funding to small and medium-scale entities, ICRA said.
While the targeted funding initiatives by the RBI and the government are positive, sustained funding from these entities remains to be seen, the rating agency said, noting that higher NPAs would make it difficult to raise funds from banks.