NBFC stress will ease from FY22: Experts

The stressed asset pool of non-banking financial companies (NBFCS) has swollen since the end of the moratorium. However, this trend is set to turn in the next financial year (FY22) with the recovery in the economy, say industry insiders.

The level of stress in the sector will be less intense as economic activity has been improving gradually, resulting in better collection efficiencies of these lenders.

Ratings agency CRISIL in a report estimated that stressed assets of finance companies could reach 6-7.5 per cent of their overall assets under management (AUM), or ~1.5-1.8 trillion, by the end of FY21, reflecting the impact of Covid-19 pandemic.

Stressed assets are the pool of proforma gross non-performing assets (GNPA), including accounts not declared NPAS in line with the Supreme Court’s order, and potential stress in loan book (including restructuring). The regulatory interventions and the apex court’s order on standstill in classification of assets as NPAS have meant that the real stress in the sector is yet to be seen.

Shubhalakshmi Panse, director on the board of Canfin Housing Finance, said, “The economic and business environment has been changing for better and the level of stress formation in coming months (beyond March 2021) will be less than what was seen during the pandemic.”

The stress (rise in pro-froma NPAS) is linked to economic performance, said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services. But, the recovery is also visible in segments such as auto, he added.

“Those in ancillary and value chain are looking to grow business with financial support from lenders. So they clear dues to get fresh funds and that reduce prospects of future stress,” Parekh said.

Experts said they had anticipated a spike in stressed assets in the sector once the moratorium on payments expired as not all customers got the option to restructure because of the strict eligibility criteria. Another aspect is that at the retail level (households) have opted less for restructuring or also avoided getting into default as this impacts credit score, Panse said.

The chief executive officer (CEO) of a mid-size housing finance company said, “The rise in stressed assets gradually started from September 2020. Accounts that were 30 days past due (dpd) at the end of September have become NPAS now, although not classified as such. Similarly, accounts that were 60 dpd have also turned NPAS by now. Hence, after January, there will be hardly any rise in stressed assets.”

“We are seeing a rise in pro-forma NPAS because recovery action cannot be initiated due the standstill agreement of Supreme Court on classification of NPAS. Things will return to normal by September or December of this calendar year (2021),” he added.

The CRISIL report pointed out that some segments such as real estate, structured credit, vehicle finance, MSME, and un-secured loans have struggled more than the relatively safer segments such as home loans and gold loans. However, it said, in vehicle finance the impact will be transitory, and collection efficiencies will continue improving over the next few quarters as economic activity improves.

Echoing this, Umesh Revankar, MD and CEO, Shriram Transport Finance, said, “The vehicle financing segment looks pretty good at this point. As far as collection efficiency is concerned, we have seen improvement with each passing quarter in our books. Other segments such as personal and SME may see some spike in stressed assets.”

Piyush Khaitan, founder and MD of Neogrowth Credit, said, “We are already witnessing encouraging signs in collection efficiency and our target segment, ie consumer facing retail businesses, is picking up gradually with revival in demand.”