Credit growth of non-banking finance companies (NBFCs) is expected to slow down by 140 bps to 12.8 per cent due to the impact of the second wave of the pandemic, Emkay Global Financial Services said in a recent report. It is anticipated that the second wave is expected to impact the segment, the severity of which is likely to depend on the extent and the nature of the lockdown in each state of the country.
Further, the credit growth in self-employed categories will bear the biggest brunt of localised lockdowns. There is a possibility of 50-70 per cent demand destruction for self-employed oriented products and 25 per cent for salaried class-focused products during the lockdown. It is expected that within retail assets, the self-employed category accounts for nearly a third of the product portfolio.
The Emkay report points out that most banks and NBFCs are now well-capitalised and carry 30-100 bps of Covid provisions. For NBFCs, the aggregate impact on GNPA could be around 15-25 bps. The report says that once lockdowns are lifted, credit growth in home or auto loans should come back strongly.
The report observes that NBFCs and banking lenders are likely to remain cautious in the personal loan segment due to underlying asset-quality risk and weak collection efficiencies. Although rural areas have also been impacted in the second wave, consistent rural output should support growth in gold loans and tractor loans.
The Emkay report also points out that NBFCs with higher exposure to urban and business customers will see higher growth disruption, although currently, credit appetite remains healthy with salaried urban class, rural consumers and corporates being largely unaffected from the current less severe lockdowns. Despite this, the self-employed and urban customer segment could still be the most affected, while the salaried class is relatively less impacted this time due to limited retrenchments and salary cuts.
Experts at Emkay observe that based on the RBI’s prescription and internal assessment, many banks and NBFCs have mobilised capital in the recent period, building reasonable capital buffers to absorb any asset-quality shocks and remain ready for growth to support the economy once macroeconomic conditions normalise.
A few market experts also point out that the second wave of the Covid pandemic poses a risk of asset quality and liquidity issues for (NBFC) and these challenges are likely to increase if recent restrictions to contain the pandemic are expanded or prolonged, leading to greater economic and operational disruption. It is expected that an increase in the rate of infections and broadening of social distancing restrictions pose downside risks to its 10 to 15 per cent growth projection for the current fiscal.
“I believe a resurgence in asset quality pressure for NBFCs could lead to renewed funding strains for the sector, particularly as many government schemes that provided funding relief to NBFCs in 2020 have expired. These include the Partial Credit Guarantee scheme supporting asset-backed securitisation and Special Liquidity Scheme providing government-guaranteed short-term funding relief. The microfinance segment may see credit cost moderating to 5 per cent in FY22 compared to an estimate of 6.5 per cent in FY21. Microfinance has proven to be a resilient asset class as demonstrated in the past.
Furthermore, a large proportion of the overall portfolio (close to 75 per cent) is in rural areas and catering to essential services. The asset quality is expected to improve once the pandemic starts subsiding and may take three to four quarters to normalise,” Rajiv Ranjan the founder of PaisaDukan.com a NBFC P2P firm told THE WEEK.
