Asset quality of shadow lenders is expected to deteriorate considerably in FY21 due to the disruption in economic activity caused by the spread of the deadly virus and the subsequent lockdown imposed to contain it. Rating agency Icra expects the non-performing assets (NPAs) of non-banks, including housing finance companies (HFCs) to touch 5-7 per cent by end of March 2021 from 3.3-3.4 per cent in March 2020, assuming a slippage of 5-10 per cent in the assets under management of the shadow banks.
It is expected that the NBFCs will face a heightened pressure on the asset quality with NPAs touching 7-9.5 per cent by March 2021. The HFCs will be better off as compared to NBFCs with NPAs expected to touch 3.4-4.8 per cent.
The asset quality of non-banks is expected to weaken sharply in the current fiscal, as the covid 19 related lockdowns have significantly disrupted the borrower level cashflow, which may recover only over a prolonged period, the rating agency said.
With Reserve Bank of India directing banks and non-banks to offer moratorium on repayments for their customers, a large number of NBFCs have seen a high share of their portfolio under moratorium. For NBFCs sector, on an average around 52 per cent of their portfolio is under moratorium and for HFCs it is 28 per cent. Entities operating in the commercial vehicle segment, small and medium enterprises and other vehicle segment have seen a significant proportion of their portfolio under moratorium.
While the shadow banks offered a moratorium to their customers resulting in lower collections, banks refused to give a blanket moratorium to the NBFCs and HFCs thus a creating a cashflow problem for these entities. After much negotiation, banks agreed to provide moratorium to NBFCs only a case to case basis.
Post IL&FS debacle, funding for NBFCs in the domestic market dried up with only higher rated NBFCs with good parentage and better ALM positions got funds from the banks as well as the market. For mid to small sized entities, access to funding was a huge constraint and similar environment will persist in the near future.
“Capital market funding is expected to remain constrained in the near to medium term and is expected to find it way only to the large, better rated and entities with strong parentage or group support”, said ICRA in its report.
While the CP rates have moderated substantially, the issuance volumes have remained low and are going to a select set of entities. External commercial borrowings which supported the funding during FY2020 is also expected to remain muted, it further added.
It is expected that banks may need to revise their internal sector caps for their exposure to non-bank sector. As of March 2020, bank funding constitutes 31 per cent of the borrowing profile of NBFCs, bond issuances take up 34 per cent, securitization is 10 per cent, commercial papers are 5 per cent and external commercial borrowing is 5 per cent. Non-convertible debenture (NCDs) issuances have gone down from Rs 731 billion in March 2019 to Rs 324 billion in June 2020. NCD issuances are largely driven by a few large players in the housing finance segment and large PSU NBFCs. And risk aversion among investors have kept the spreads for NBFCs/HFCs high.
In the near future, maturities in the lower rating categories (A+ and below) are not substantial hence targeted funding to these entities would help them weather the near-term headwinds, said ICRA. Also, a pick- up was observed in the TLTRO -2 funding towards small/mid sized NBFCs during June 2020; largely to the A-rated entities.
As far as commercial paper issuances is concerned, it has fallen to Rs 2 trillion by June 2020 and maturities around Rs 1.2 trillion is expected to come up between June 2020 – June 2021.Similarly, bank loan maturities estimated at about Rs 3 trillion is coming for the NBFCs in the current fiscal.
“Increased bank borrowings by larger entities (direct/indirect) could impact the funding flow to the mid and small scaled entities. While the targeted funding initiatives of the RBI and GoI is a positive, sustained funding to these entities remain to be seen”, the rating agency said.