'Repayment relaxation for small borrowers to help MFIs, NBFCs'

Reserve Bank's move to give some relaxation for repayment to small borrowers will help micro finance institutions and NBFCs better manage their asset quality, says a report.
Reserve Bank today provided additional 60 days for repayment of housing, car, farm and other loans worth up to Rs 1 crore.
"RBI has today relaxed the prudential norms on asset classification by an additional 60 days for lenders (applicable for dues payable between November 1, 2016 and December 31, 2016). We believe this will provide some respite to the non-banks in managing asset quality in the interim period," domestic rating agency Crisil said in a note here today.

It, however, said if the disruption prolongs beyond two months, asset quality pressures could manifest.
Typically, MFIs and many NBFCs deal with under-banked and un-banked customers where a significant portion of transactions is in cash.
While banks have been allowed to accept demonetised currency notes, regulatory clarity is still awaited on whether MFIs and NBFCs can do so towards loan repayments from bona fide customers, the report said.

As a result, NBFCs that are into used vehicle finance, microfinance, and gold finance have seen a significant drop in their collection efficiencies.
"We believe MFIs and NBFCs are reducing cash disbursements and working with borrowers to improve collections by using their own field staff to get demonetised currency notes exchanged," it said.

On the other hand, there would be no impact on loans serviced via non-cash channels (physical cheques, e-payments).
It further said NBFCs operating in developer finance and loan against property (LAP) are the most vulnerable, if the disruption prolongs beyond two months.
"And given the profile of their borrowers, overdues are likely to increase in the early buckets. While loan servicing may continue based on the strength of cash flows, a potential rise in the loan-to-value ratio (LTV) following price correction will reduce the collateral cushion available," the report said.