De­mon­eti­sa­tion brings down re­tail loan col­lec­tions: ICRA

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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.

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