Non-bank financial entities' restructured loans to rise 3.3% by March: ICRA

Covid-19 and lockdowns to slow down its spread have affected the cash flow of borrowers, says agency

Restructured loan books of non-bank financial groups may double to 3.1-3.3 per cent by March 2022 from 1.6 per cent in March 2021, hurt by the second wave of Covid-19 infections hitting borrowers, rating agency ICRA has said.

Covid-19 and lockdowns to slow down its spread have affected the cash flow of borrowers and delayed economic recovery, according to ICRA. Non-bank financial entities cover finance companies and housing finance firms (HFCs).

The Reserve Bank of India (RBI) has allowed lenders to restructure their credit, while maintaining the standard asset tag in FY21. The central bank has included loans to small businesses, which are the key target segment for non-bank finance entities, and extended the micro, small and medium enterprise (MSME) restructuring window to September 2021.

ICRA said the second wave had affected the budding recovery in non-bank collection witnessed in the third and fourth quarters of FY21.

After rebounding to pre-pandemic levels in the fourth quarter in FY21, the monthly collection efficiency of rated retail loan pools dropped by 10-35 per cent across asset classes in May 2021 against March 2021.

As gradual unlocking began in June, some improvement in collection was visible but the pace is gradual, finance company executives said.

The rating agency said the restructured books for finance companies were expected to be 4.1-4.3 per cent as of March 2022 (up from 2.2 per cent in March 2021). They are expected to be 2.0-2.2 per cent for HFCs (up from 1.0 per cent in March 2021). The incidence of delinquencies tends to be lower for housing loans. They have secured products and closely linked to basic needs, so borrowers give top priority for regular repayment of home loan installments, finance industry executives said.

Finance companies had a high restructured outstanding as of March 2021 compared to HFCs due to the nature of their exposures.

For HFCs, security is in the form of mortgage while finance companies’ exposures are either unsecured or backed by varied asset classes like vehicles, mortgages, plant and machinery, inventories, and receivables, ICRA added.

The target borrower segment also plays a key role as a high share of restructuring was observed in smaller entities (assets under management of less than ~5,000 crore). Borrowers served by these entities would have a relatively high-risk profile, also characterised by higher yields.