Second Covid-19 wave: NBFCs brace for defaults, grim business prospects

With falling collections in the second Covid wave and rising pressure on borrowers’ earnings, finance companies are staring at a rise in defaults and grim business prospects in the near term.
 
The situation is even more challenging for small finance firms and microfinance institutions (MFIs) — many of which are unrated.
 
They struggle to get funding support, while their borrowers hold back repayments to tide over the pandemic. The refinancing window (by financial institutions) needs a rehaul to facilitate access to them.
 
Karthik Srinivasan, group head-financial sector ratings, ICRA, said the collection, which had improved to move in excess of 90 per cent by March, has declined 7-10 per cent from April due to lockdowns imposed by states to contain the spread of the contagion.
 
The collections are down as staff is not able to reach out to customers. If lockdowns prolong, many non-banking financial companies (NBFCs) will have to face the challenge of reduced business prospects in the near term.
 
The asset quality may come under pressure, caution NBFC executives.

 
According to the Reserve Bank of India (RBI) data, gross non-performing assets (in percentage terms) declined from 6.9 per cent in March 2020 to 5.3 per cent in December 2020.
 
Srinivasan adds a caveat. The situation is different this time, compared to last year (first Covid wave) when collection work had come to a halt due to a nationwide lockdown.
 
Ramesh Iyer, vice-chairman and managing director (MD), M&M Financial Services, said unlike April last year when the collection efficiency was as low as 10-20 per cent, this time it has been much higher at 70-75 per cent. There is a 10-15 per cent impact on collection efficiency one is witnessing. But this time, the rural market could take longer to stabilise.
 
Amit Goenka, MD, Nisus Finance Services, which funds real estate developer projects, said in this spell (second Covid wave), the demand is steady from large realty firms. Small- and medium-sized firms are under water. There is also the threat of defaults and insolvency, added Goenka.
 
While large finance companies have the wherewithal, small NBFCs and MFIs face liquidity pressures.
 
Nitin Chugh, MD and chief executive, Ujjivan Small Finance Bank, said small MFIs are feeling the pain much more. Last year, many did not get a moratorium by lenders, even as they had to offer a moratorium to their customers.
 
The situation may worsen with the second wave for small MFIs. The RBI scheme (funding through small finance banks) is a good step for them. The bank has received some proposals (from small MFIs) and is evaluating them, said Chugh.
 
Senior executives with the state-owned refinancing agency said while support is going to existing registered and rated MFIs and small NBFCs, it is difficult to give funding support to new-age entities. Many of them are unrated. The current framework limits the scope and needs revision to expand the tally of firms which can benefit from refinancing.