Second wave hurts collection efficiency
Credit rating agency ICRA finds that collections of securitization transactions in April 2021 have shown a sharp decline:
There is a sharp decline in the collections of credit rating agency I C RA’ s rated securitization transactions in April 2021 (ie May 2021 payouts), following the rise in covid cases and imposition of lockdowns /movement restrictions which has i mpacted the operations and collection activities of NBFCs HFCs, says the agency. It says the decline has been sharpest for microfinance entities where collection efficiency (including advances and overdue collections) was lower by 20% in April 2021 compared to March 2021. Collections for SME loan pools and commercial vehicle loan pools also fell significantly from the heights achieved in March 2021. However, housing loans (HL) and loans against property (LAP) have remained the least impacted and most resilient as was seen last fiscal given the association of the borrower with the underlying collateral and the priority given by borrowers to repay such loans.
Abhishek Dafria, Vice President & Head - Structured Finance Ratings at ICRA, says the collection efficiencies took a beating in April 2021 and dropped in the range of 8-20% in April 2021 from previous month across the asset classes with the onset of second wave of pandemic. “Collections would have declined further in May 2021 especially for microfinance pools where the entities have a high share of cash collections. Accordingly, the delinquencies for the retail loan pools that had seen gradual reduction in Q4 FY2021 are now again expected to reach elevated levels. Nonetheless, we expect a rebound in collections from June 2021 at least in some geographies, that are now far below the peak levels of daily infections, on account of gradual easing of restrictions/lockdowns. With NBFCs and HFCs slowing down on fresh disbursements, improvement in collections continues to remain their top priority at the moment,” he adds.
ICRA maintains t hat basi s t he disruption caused by the second wave of the pandemic and resurgence of wariness among investors regarding the asset quality and future cash flows, the securitisation volumes in Q1 FY2022 are expected to remain weak. “Trend till now in Q1 FY2022, indicates that secured asset classes such as HL & LAP and gold loans have again gained prominence given their historical stable performance and presence of collateral ensuring lower eventual losses in case of defaults. The securitisation of unsecured loans (ie microfinance and SME loans) have been lower till now which is in-line with the trend seen in FY2021,” explains the agency.
It is hopeful that the declining covid infection rates and increasing focus of government to vaccinate a major share of population over the next 6 months, if implemented successfully, would help in improving business activities and lend support to overall securitization volumes in future. “We expect the securitization volumes in FY2022 to be higher than the previous fiscal with a majority proportion happening in the second half of the fiscal. We expect the credit ratings of securitization transactions to remain largely stable given the adequate credit enhancement to meet interim shortfalls in collections and the expected improvement in collections,” it says.