Credit cost to more than double for NBFCs, says Acuite Ratings

Despite restructuring relief from Reserve Bank of India (RBI), credit costs are likely to more than double for most of non-banking players, Acuite Ratings and Research said on Thursday. In a discussion on non-banking financial companies (NBFCs) amid Covid-19, the rating firm said that profitability headwinds for shadow banks would remain high due to sharp decline in disbursements. RBI had earlier allowed lenders to restructure personal as well as corporate loans with strict barriers.

PN Prasad, former deputy managing director (DMD), State Bank of India, said that restructuring exercise would be co-operation test for the lenders as they have to act quickly to resolve accounts. The regulator has mandated banks and NBFCs to form inter-creditor agreement (ICA) for resolving corporate accounts, to be invoked by December, 2020.

The rating firm, however, expects liquidity to remain stable for NBFCs including housing finance companies (HFCs). Suman Chowdhury, chief analytical officer, Acuite Ratings and Research, said that liquidity for most players is likely to be stable due to availability of refinancing support from banking system. The rating firm said that over `75,000 crore was raised by NBFCs from April to July this year through long term repo operations (LTRO) and targeted long term repo operations (TLTRO). “Over `6,000 crore was raised by NBFCs and HFCs in A and BBB category, despite the increased credit aversion,” Chowdhury further said.

Kailash Baheti, group chief financial officer (CFO), Magma Fincorp, said that liquidity flow for NBFCs should be continuous. “Oversupply or undersupply of money is not a great thing,” he added. Similarly, Sandeep Menon, founder managing director (MD) and chief executive officer of Vastu Housing Finance Corporation, acknowledged that his firm has reduced its cost of funds in past few months. However, he cautioned about liquidity being available for shorter duration. “Short term opportunism may hurt you in long term,” he said.

Acuite Ratings suspects stress to be higher in commercial vehicle (CV), small and medium enterprises (SME) and urban microfinance portfolios to be reflected through either higher non-performing assets (NPAs) or restructured loans in next two-three quarters.

The rating and research firm also highlighted that NBFCs had started to report a pick up in collections from June. Although, a significant portion of NBFCs continues to remain in moratorium. As per rating agency, around 45% of NBFC loan book is under moratorium in the second phase. This number has significantly reduced from levels of 65% of the loan book under moratorium in the first phase. RBI had allowed lenders to grant moratorium relief to borrowers for three months from March 1, in the first phase. The regulator extended moratorium period by three months till August, 2020 in the second phase.

With an end to moratorium in August, delinquencies are expected to rise, which will test the collection infrastructure of the lenders, the rating firm said.