India Ratings and Research (Ind-Ra) has changed the outlook for retail non-banking finance companies (NBFCs) and housing finance companies (HFCs) to “improving” from “stable” for the second half (2H) of FY22.

The credit rating agency opined that adequate system liquidity (because of regulatory measures), along with sufficient capital buffers, stable margins due to low funding cost and on-balance sheet provisioning buffers, provides enough cushion to navigate the challenges from a subdued operating environment.

This operating environment could lead to an increase in asset quality challenges due to the second Covid wave impacting disbursements and collections for non-banks.

Ind-Ra observed that the operating environment is dynamic due to the likelihood of a third Covid wave, its intensity, regulatory stance and its impact.

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The agency believes the segments facing heightened delinquencies for non-banks are two-wheelers, passenger vehicles, unsecured and secured business loans, microfinance and commercial vehicles. It expects these segments to remain under pressure during 2HFY22 as business momentum remains subdued.

The housing and gold finance segments have been more resilient to the pandemic and would remain so over the medium term.

The agency believes that in this environment, meaningful variations are likely in the performance among different asset classes, which would reflect on non-banks, depending on their assets-under-management mix.

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“NBFCs with a diversified asset mix and non-overlapping customer segments could be considered better placed to navigate operating challenges and may report a less volatile operating performance,” Jinay Gala, Associate Director, Ind-Ra, said.

High delinquencies

The agency found that asset quality for non-banks had deteriorated in FY21, and there was a build-up in 1Q (April-June) FY22, keeping headline numbers elevated in FY22.

The overall stressed book (gross non-performing assets plus restructured book) for the top 10 NBFCs rose to 6.4 per cent in FY21 from 5.4 per cent in FY20, Ind-Ra said.

Furthermore, the book’s benefit through the Emergency Credit Line Guarantee Scheme (ECLGS) would be around 5.1 per cent, where there could be slippages post moratorium, mostly in FY23.

Similarly, HFCs witnessed a rise in delinquencies where the overall stressed book for the top 10 entities rose to 3.8 per cent in FY21 from 2.3 per cent in FY20.

Ind-Ra underscored that the rise in delinquencies was high in 1QFY22 for NBFCs (top 10) and HFCs (top 10), where gross non-performing assets increased quarterly by 35 per cent and 26.5 per cent, respectively.

Gala observed that as the overall stress on the loan book is on the rise, loss, given default, could increase if resolution delays are longer than envisaged.

Due to the pandemic, there were frequent lockdowns across states, leading to difficulties in the enforcement of hard collateral and the possibility of a resolution through Section 13(2), SARFESAI, or through debt recovery tribunals, the report said.

“NBFCs are well capitalised to withstand any impact due to the fluid operating environment. Larger NBFCs have raised equity capital over the past 1-1.5 years and smaller NBFCs were anyway less levered. So, from a stress case perspective, the buffers are adequate to absorb any asset quality shock,” Gala said.

Unchanged growth

In FY22, the agency expects growth for NBFCs to be maintained at 9-10 per cent, in line with earlier stated expectations, and HFC growth could be maintained at 10 per cent.

Ind-Ra believes diversification in product lines remains crucial for non-banks to drive growth during cyclical downturns and to have a wider product basket that negates the risk of a single asset class franchise.

Impact on asset classes

In a report, Gala noted that growth in the commercial vehicle segment remains challenged, whereas certain sub-categories of vehicle finance such as tractors and small commercial vehicles could sustain their growth momentum during 2HFY22.

The gold segment, which witnessed reasonable growth due to rising gold prices in FY21, is likely to witness tapered growth in FY22, in the absence of a sharp pullback in prices, the report says.

Loan against property remains challenged where collateral values have been impacted due to the lack of resolution and challenges faced across micro, small and medium enterprises amid cash-flow disruptions, it added.

Further, lenders in the personal loan and business loan segments in the unsecured category are likely to be among the most impacted asset classes and the lenders would remain cautious.

Lenders are likely to look for stronger borrowers; supply-chain financing, where their obligations remain on strong anchors, could gain traction.

“The microfinance segment witnessed challenges during the second wave, where the collection efficiency was impacted due to the widespread nature of the pandemic in rural areas.

“Although collection efficiency and disbursements would improve, they will not without taking their toll in the form of elevated credit costs,” Gala said.