After Q1 spike, NBFC bad loans to ease in FY22 as collections improve: Icra

Rating agency says the 90-day-plus dues, which touched 6.3% this June, may drop to 5.3% by March 2022 under base scenario

After a spike in stress in the June 2021 quarter, the asset quality profile of non-banking financial companies (NBFCs) and housing finance companies (HFCs) is expected to moderate by March 2022 as the collection efficiency (CE) trend remains encouraging.

Rating agency Icra  said gross non-performing assets (gross NPAs) — the 90-plus day dues — which touched 6.3 per cent this June, may decline to 5.3 per cent by March 2022 under the base scenario.

They could touch a higher level of 5.8 per cent under a stressed scenario. The impact of the expected third wave would be a differentiator.

Besides increase in repayments, the growth reflecting the festive season demand and economic revival would expand the loan book. This will also reduce the share of GNPA's in total loans in percentage terms. Icra has penciled a growth of 7-9 per cent in loans (combined for NBFCs and HFCs) for FY22. This comes on a low base in 2020-21 (four per cent growth) when business was hit by the Covid-19 pandemic.

Loan book shrank for the NBFC segment in Q1 of FY22 while that of HFCs remained flat.

Disbursements were subdued and portfolio was rundown, in the absence of any moratorium in Q1 of FY21. Also, competition from banks in the housing segment led to increased balance transfer.

ICRA said the asset quality weakened sharply in Q1 of FY22 due to the localised lockdowns imposed by various states in the second wave. It hampered the collection process of entities and also impacted the fragile recovery in the cash flows of borrowers, who were affected by the pandemic in the last financial year.

The rating agency said the borrower-level liquidity got stretched, in the absence of a loan moratorium like the one provided in FY21. Therefore, the marginal borrowers slipped into the NPA/overdue category during this period.

As for the impact of high slippages in provisions, ICRA said the credit cost of finance companies spiked sharply in Q1 of FY22 as write-offs remained elevated. The provisions went up in view of the increase in the overdues.

While NPAs of HFCs also rose in Q1 of FY22, credit costs moderated vis-à-vis Q4 of FY21. Their provisions did not go up sharply like in the case of NBFCs and write-offs were negligible.

NBFCs will see credit costs declining from 4.7 per cent in June to 3 per cent by March 2022 and 1.9 per cent by March 2023. For HFCs, credit costs are estimated to decline to 0.5 per cent by March 2022 and 0.4 per cent by March 2023, Icra added.