Demonetisation brings down retail loan collections: ICRA

Following the Union Government’s demonetisation decision on November 8, 2016, there has been a disruption in the liquidity available in the hands of people, which in turn has impacted economic activity in the nearterm.

NBFCs’ inability to accept repayments in old currency, shortage of valid currency among borrowers, and disruption in borrowers’ regular business, especially the cash-intensive ones, impacted collection efficiency in the various retail loan pools securitised by NBFCs. The extent of impact has varied across asset classes.

ICRA’s analysis of 182 live securitisation transactions across various asset classes like Commercial Vehicle (CV), Tractor, Micro Small and Medium Enterprises (MSME), Micro loans, Home Loans (HL) and Loan against Property (LAP) has revealed the negative impact.

Micro Loan, MSME loan and Tractor loan pools witnessed a sharp decline in collections. While collection in micro loan sector is almost entirely in cash, collections in case of MSME loans of smaller ticket size and tractor loans also largely happens in cash.

Median monthly collections of micro loan pools declined to 91% from 99.8% till September 2016. Collections of some pools declined to 50%-70% levels. The 0+ dpd3 level in micro loan pools that was sub 0.5% until October 2016 spiked to 9% in November 2016.

The collection efficiency in 10 pools dipped to less than 70%, 9 of which belonged to a single Originator. All these pools had sizable share of contracts originated in Uttar Pradesh and Madhya Pradesh, where the collections were adversely impacted following political intervention by some local leaders and rumours of loan waivers.

High collection efficiency was reported in pools with weekly repayment cycles or for pools where collections were mostly completed prior to the announcement on demonetisation.

Collections in MSME loan pools also witnessed a sharp decline to 83% from 95% in the previous month. Here again, some pools saw collections declining to 40%- 70% levels from 70%- 90% levels earlier. Though the average 0+ dpd level increased to 11% in November 2016 from 5.3% in October 2016, the increase in 30+ dpd level was very low.

All 7 pools with collections below 70% in November 2016 had a high share of loans with ticket size of less than Rs 3 lakh, a sub-segment where a sizable portion of the collections are in cash.

Median collections across tractor loan pools declined to 84% in November 2016 from around 95% in the previous month. 0+ dpd level increased to 16.5% from 14.5% in October 2016, while the 30+ dpd level remained largely stable.

Due to currency shortage, farmers either faced a loss of income due to reduced off-take (for perishable food items like fruits and vegetables) or delayed realisations (many farmers were forced to deposit their produce with the mandis on credit). LAP collections declined to a small extent. Collections in LAP pools declined from 97% in October 2016 to 94.6% in November 2016. While the 0+ dpd level increased slightly, other delinquency buckets did not get impacted much. However, the monthly prepayment level declined to an average of 1.3% from a level of 2.1% seen till September 2016.

Collections in CV and HL pools were not much affected. Collections in HL pools remained largely unaffected. Similarly, collections in CV loan pools remained resilient. However, softer delinquencies inched up a bit in these asset classes as well. Prepayment in November 2016 declined.

In November, some of the retail loan pools were not impacted much either because the borrower(s) paid the instalment from the earnings of the previous month/ savings or because the instalment date fell before or very close to the date of demonetisation announcement. Also, acceptance of old currency notes in petrol pumps and waiver of toll charges benefitted the CV operators in November.

The performance of the retail loan pools in November 2016 was not a full reflection of the extent of disruption after demonetisation. The performance of the ICRA rated pools going ahead will depend primarily on the restoration of currency supply in the system, the degree of impact on the borrower’s business volumes and cash flows over the medium to long-term. The performance of these pools during the coming months will be crucial.