Non-bank finance companies (NBFCs) would see a major impact on collections in 1QFY22 due to the regional lockdown announced by various state governments to handle the second covid wave. Unlike the first wave, even the field collection staff is exercising restraint in venturing out to collect EMIs. Cash-based collections along with recovery from overdue cases would be hampered heavily due to lack of mobility impacting collection efficiency across asset classes. The infection has spread among the employees of NBFCs and as per Ind-Ra's discussion with the various issuers, 8%-10% of the staff comprising mostly collection and branch operation teams were infected during the second wave.
Ind-Ra believes that the pandemic and the related measures undertaken by the government would have a differential impact on collections, based on geographies and product segments. As per Ind-Ra's assessment, southern states have witnessed a sharper fall in collections in May 2021 over other states, as the lockdown was delayed, whereas northern states were impacted more in April. Ind-Ra believes that the states which were under a severe lockdown and are better equipped to manage the pandemic would show an early revival in collections, though there may be a severe drop in collections in May 2021. However, districts where collections are impacted more due to the health crisis rather than a clampdown could take a longer time to recover, since the pandemic may have a long-term impact on that region's business activity and borrowers’ cash flows.
Monthly collection efficiency numbers for 2HFY21 improved due to the recovery of overdues of previous months along with some part of book being restructured or given ECLGS benefit. Also, the moratorium allowed during March-August 2020 helped borrowers conserve cash to make repayments. The second wave has been severe which has led to borrowers conserving cash to meet exigencies by postponing repayments where the impact has been widespread across rural and urban areas, unlike the first wave impact which was urban centric.
Differential Impact Across Various Segments
Significant Impact on MFI Collections: With the second wave penetrating rural markets, the microfinance institution (MFI) sector’s collections in April 2021 broadly lagged 5% compared to March 2021 (which in turn had a 3%-5% collection shortfall). May 2021 witnessed a sharper drop in collections (10%-15%) than even April 2021 as states implemented stricter measures to manage the second covid wave. Overall, with lifting of the restrictions in some states since June first and second week, the sector on a consolidated basis could witness a collection shortfall of 15%-20% compared to March 2021. That being said, the variation among MFIs could be wider, depending on their level of concentration in regions where lifting of restrictions could be slow.
Vehicle Financiers Face Steep Decline in Collections: Less load availability, a decline in freight rates and a rise in diesel prices have had a toll on the cash flow of commercial vehicles. The capacity utilisation has dropped significantly to 40%-60% which makes debt servicing a challenge. A similar impact has been seen by vehicles that are involved in tourist services, school bus operations, and local conveyance where a large portion of this book may already be restructured or may have slipped into NPAs. Ind-Ra highlighted this in its recent released report "Vehicle Financers Facing Risks Amid Borrowers’ Falling Fleet Utilisation & Cash Flows."
The collection efficiency for vehicles deployed in goods and passenger movement declined by 6%-7% in the first fortnight of May 2021 over April which was down by 6%-7% from March levels. However, in the second fortnight of May 2021 based on discussion with financers, the drop has been substantial where collection efficiency for May 2021 could be 45%-55%.
Tractor Loan Borrowers could be Aided by Better Monsoons & Higher Minimum Support Price: The agri equipment segment is benefitted by a reasonable agricultural output; however, tractors are also deployed for non-agri activities which have suffered during the pandemic, affecting the cash flows. Various states’ Agricultural Produce Market Committee markets were closed for certain days affecting trade activities in commodities and other crops. Though the agri produce has been good, the monetisation of the same could be a challenge, given the impact on mandis and bigger markets. Drivers such as a third consecutive year of good monsoons and a rise in minimum support price could support the cash flows of the farming community.
Increased Delinquencies in SME/ LAP may Further See Upside: Small and medium enterprise (SME) / loan against property (LAP) segments which is a staple product of most of the NBFCs targeted towards SME and self-employed customers was already facing heightened delinquencies. Business cash flows have been impacted due to the restrictions imposed by the government on the opening of establishments and also migration of labour. Infections among employees also put a spanner in the smooth operation of businesses. However, the impact in this segment would be low due to the continuous operations of businesses engaged in essential services. Customers in this segment also have a better credit profile than small road transport operators or small commercial vehicle borrowers. Also, the exposure that NBFCs have on SMEs is distributed over a variety of businesses that has a varying impact on their operations. Borrowers in the hospitality, textiles, gems and jewellery and tourism sectors are heavily impacted; however, businesses linked to pharmaceutical, metals, and FMCG sectors are relatively less impacted.
Housing Segment Proves to be a Safer Asset Class: Housing segment, considered the safest asset class, has again showed its resilience during the pandemic. The collection efficiency in May has not been materially different than April. Digital/electronic mode of collections and substantial proportion of exposure on the salaried borrower have mitigated the impact. Self-employed customers have added to the delinquency pressure; however, given a choice between paying a vehicle loan versus a home loan, the latter gets the obvious priority. On the affordable housing front also, collection efficiencies have been more than 90% in April and May. Ind-Ra believes the asset classes such as vehicle finance and microfinance which require more of physical collection for normal business and overdues could be impacted more in the second wave than housing and LAP.
Adequate Liquidity Buffers with NBFCs: A decline in collection efficiency and / or restructuring of loans, giving additional time for repayments to borrowers, could impact the liquidity profile of NBFCs. Ind-Ra has been closely monitoring the liquidity status of NBFCs and opines that the liquidity buffers are intact. NBFCs have slowed disbursements looking at the challenging macro environment in 1QFY22. Higher rated entities have mobilised funds from the capital market and banks and have maintained a conservative liquidity policy. As per Ind-Ra’s assessment, even under a zero-collection scenario, NBFCs have enough liquidity to meet two to three months of debt obligations. Equity infusions in some entities have also resulted in shoring up capital buffers. Small NBFCs are relatively less leveraged and hence are able to manage the servicing of fixed obligations.
