Currency ban hits NBFCs;pain to stay for one more qtr: Experts
The demonetisation drive may have turned out to be a jackpot for banks by way of cheap deposits, but non-banking finance companies have a different story to tell. NBFCs. The impact has been more severely felt in rural areas, with many clients unable to honour their loan repayment schedule.
The demonetisation drive may have turned out to be a jackpot for banks by way of cheap deposits, but non-banking finance companies have a different story to tell. The move has affected the cash flow cycle of most small businesses, which form the core clientele of NBFCs. The impact has been more severely felt in rural areas, with many clients unable to honour their loan repayment schedule.
The RBI has given a breather to NBFCs by relaxing non-performing asset recognition norms by 60 days, for payments due between November 1 and December 31. However, analysts say there could be a hit to the asset quality of NBFCs as many of their clients’ businesses may take a while to recover from the demonetization blow.
A strain on their loan book could hamper the ability of NBFCs to borrow money at an attractive rate. This in turn would restrict their ability to disburse loans to fresh borrowers.
A recent research report by Religare states that “demonetisation will have a three-stage impact on NBFCs. The first will be immediate but short-lived due to transitory cash crunch and while the second will be due to a general economic slowdown and bleeding of the parallel economy as shadow borrowers may lose their competitive edge. The third-order impact will arise from a permanent shift of borrowers from NBFCs to banks.”
The report further states that NBFCs are still trading at rich valuations despite a steep correction since November 8. However, this correction factors in only a temporary slowdown and resultant asset quality and growth issues for six months.
NBFCs, too, confirmed that there have been issues post demonetisation.
“Basically, there were two immediate issues we faced post demonetisation,” says VP Nandakumar, Managing Director and Chief Executive Officer of Manappuram Finance.
“Firstly, some of our customers faced problems in making repayments as we had to stop accepting old notes all of a sudden. Secondly, with regard to loan disbursements, we faced issues regarding availability of cash when disbursing small value gold loans of less than Rs 1 lakh where borrowers are keen to get the amount in cash”.
Concurring with Nandakumar’s, George Alexander Muthoot, MD of Muthoot Finance said that, “Cash crunch is affecting all. It has impacted us also. The NBFC’s major target group is low and middle income group. The current demonetisation has impacted in particular the loan disbursement and loan recovery.”
Arun Ramamurthy an ex-banker who runs his own credit improvement organisation, Credit Sudhaar, says the impact of demonetisation on NBFCs that have been catering to borrowers from towns may not be much owing to the fact that the repayment is through an electronic mode from the borrowers’ accounts.
However, the NBFCs dealing with the rural population are bound to get impacted since the borrower segment they are dealing with most of the times pay in cash and may not even have an account with the the bank.
While all market experts believe that the short term impact is inevitable, they don’t expect impact would be there for the very long term and the spill-over could stay till the next quarter.
Moreover, with the influx of deposits into the banking system, there is greater likelihood of cuts in interest rates going forward, which will benefit NBFCs.
“We have seen that the disbursements have fallen significantly. We expect the disbursement to be done for upwards of 35 percent in November. The situation is likely to remain difficult for the next month as well. Pain will continue this quarter and part of the next quarter,” Kailash Baheti, CFO, Magma Fincorp.
Nandakumar of Manappuram Finance, too, expects that there will be pain in this quarter from all the dislocation which is likely to ease in the coming quarter.
He further added that, for gold loan NBFCs, especially the tech-savvy ones, the outlook is brighter now.
Muthoot Finance believes that the NBFCs will have to struggle for 2 more months but he added that they have been able to overcome the issue as it has been encouraging online Gold loan, direct credit to customers account, loading to prepaid cards for disbursement of loan.
For repayment they are accepting payments through Webpay, Muthoot App, RTGS/NEFT/IMPS facility. They are also accepting cheques and drafts.