NBFCs' bad loans may worsen to 5-7% this fiscal due to weak economy: Icra

Non-banking financial companies' (NBFCs) asset quality is likely to worsen to 5-7 per cent in the current financial year due to weak economic growth on account of disruptions caused by coronavirus-related lockdown, according to a report by rating agency Icra.

The lockdown has significantly impacted the cash flow position of NBFCs' borrowers, it said in the report.

While the moratorium extended by the NBFCs to their borrowers is likely to give them the much-needed breathing space, their asset quality performance is likely to see sizeable dislocation from the recent trends, it said.

"Assuming a slippage of 5-10 per cent of the asset under management (AUM) under moratorium, non-bank NPAs could increase to 5-7 per cent by March 2021 from about 3.3-3.4 per cent in March 2020," the rating agency said.

Asset quality of NBFCs is likely to be more impacted than housing finance companies (HFCs), with the segmental NPA touching around 7-9.5 per cent by March 2021, the report said.

Mortgage players, on the other hand, could witness NPAs of about 3.4-4.8 per cent in the current financial year, it said.

The rating agency's Vice-President and Sector Head (Financial Sector Ratings) A M Karthik said the portfolio under moratorium for some large NBFCs is as high as 70-80 per cent, with the sectoral average of about 52 per cent, while for housing finance companies (HFCs), the average is about 28 per cent.

The additional coronavirus-related provision carried by NBFCs is about 0.7 per cent of the AUM, while for HFCs, it is about 0.2 per cent.

"The envisaged sharp increase in the stage-3 assets post moratorium window and weak economic indicators would warrant entities to further revise their expected credit loss models and increase provisions, thus impacting their earnings," Karthik said.

The agency said the liquidity profile of non-banks has remained adequate to meet near-term requirements.

While non-banks have extended moratoriums to its borrowers, not all lenders have extended a moratorium to the NBFCs, it said.

The Reserve Bank of India's (RBI) moratorium is not applicable for market instruments such as non-convertible debentures (NCDs) and commercial papers (CPs), which account for about 35-40 per cent of the outstanding borrowings.

Capital market funding for NBFCs is expected to remain constrained in the near-to-medium term and is expected to find its way only to the large, better-rated and entities with strong parentage or group support, the report said.

xternal commercial borrowings that supported the funding during 2019-20 are also expected to remain muted.

At the current juncture, funding via the banking channel is the prime source, with the share of bank' direct lending increasing to about 31 per cent in the overall non-bank borrowings in March 2020 from about 28 per cent in March 2020, it said.

The report said the extension of moratorium and expected pressures on asset quality would negatively impact loan sell-down volumes in the current fiscal.

While the targeted funding initiatives of the RBI and the government are positive, sustained funding to these entities remain to be seen.

The government's fully-guaranteed special liquidity scheme and a partial guarantee scheme for NBFCs are likely to see a subdued response as the tenor offered is quite short, the report said.