The profitability outlook for the retail NBFC sector is fairly negative in such a scenario where the business volumes are likely to shrink in first half of FY21
Non-banking finance companies (NBFCs), an integral component of the Indian lending ecosystem apart from banks, could see a major impact of COVID-19 on their liquidity position and asset quality in the financial year 2020-21.
Before the coronavirus outbreak, RBI and the government took several measures to support NBFCs since August 2019, especially after the IL&FS credit crisis created serious headwinds in September 2018.
Hence, with the improved liquidity conditions and solid business franchise, the entire NBFC space was looking to return to comfortable levels in the second half of FY20, but the novel coronavirus, or COVID-19, spread clipped the recovery.
As a result, there could be further disruption in the economy.
Many experts feel it may take at least 3-6 months for the entire ecosystem to get on track.
"Clearly, the economic disruption brought about by the COVID-19 lockdown will have a severe impact on the incomes of such borrowers for several months depending on the intensity of the outbreak," Acuité Ratings & Research said in its research note.
The RBI has provided a 3 months moratorium framework (March-May, 2020) for banks and NBFCs.
"Hence almost all retail NBFCs are expected to provide such a moratorium to their borrowers. While this is likely to provide a temporary reprieve to the retail borrowers of the NBFCs, it is likely to have significant implications for their liquidity and businesses in our opinion in FY21," the rating agency said.
The agency believes the immediate implication for the retail NBFCs is the lack of clarity on their debt servicing ability in the near term i.e. Q1FY21. "With collections coming to a standstill, the primary cash flows of the NBFCs have been completely disrupted."
It said while one can presume that most banks will provide back to back loan moratorium, there is no indication that it will be applicable for debt market instruments.
Hence the rating agency feels the key risk for NBFCs is a sharp deterioration in the delinquency levels subsequent to the expiry of the 3-month moratorium.
The rating agency has undertaken a comprehensive analysis of 11 large retail NBFCs (including Muthoot Finance, Manappuram Finance, Shriram Transport Finance Company, Sundaram Finance, M&M Financial Services, Edelweiss Financial Services, JM Financial etc) to understand the impact of COVID-19 on the immediate liquidity as well as on asset quality and profitability outlook for the sector in FY21.
While the gross advances of the NBFC sector stood at Rs 22.76 lakh crore as on March 31, 2019, retail NBFCs constituted Rs 14.48 lakh crore or 64 percent of gross advances and the selected 11 NBFCs together constitute 43 percent of these retail NBFC portfolio as on March 31, 2019.
"Our analysis of the top 11 retail NBFCs in India highlights that almost 60 percent of their borrowings (excluding securitisation) is from non-bank sources and require continuity in debt servicing. With minimal collections, the NBFCs can only depend on their cash reserves and any backup credit lines from banks, if available for servicing such debt," Acuité said.
According to the agency, the aggregated debt repayment (including interest) for this set of NBFCs in the current quarter i.e. Q1FY21 is estimated to be between Rs 60,000 - 40,000 crore while the cash reserves are estimated to be around Rs 45,000 crore.
It is apparent that many of these NBFCs would find it difficult to manage their cash flows including their operating expenses during the next 3 months unless they get access to additional bank lines or refinance, it feels.
Therefore Acuité Ratings expects the refinancing requirement for these 11 retail large NBFCs at around Rs 10,000-20,000 crore to avoid any challenges in their debt servicing and to sustain their operations.
While the COVID-19 lockdown may be gradually removed over the next few weeks, the impact on the businesses of the self-employed and SME borrowers is likely to be severe, according to the agency. Hence, it expects the collections to be severely impacted over the next 6 months with the 3 month moratorium only providing temporary relief.
Further, job losses in the unorganised sector and likely migration of a section of borrowers from urban to rural areas will also lead to higher delinquencies in FY21, it feels.
Clearly, the profitability outlook for the retail NBFC sector is fairly negative in such a scenario where the business volumes are likely to shrink in first half of FY21 along with the risk of sharply increased delinquencies, Acuité said.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.