NBFCs' retail loan quality 'pretty bad'

Retail loan companies' asset profile may be worse than conventional methods to measure defaults suggest, according to a study by CRISIL Ltd.'s ratings analysts released Tuesday. It proposed credit appraisal of retail lenders must involve measuring loans that were number of days-past-due date.

"The study reveals that CRISIL's rated non-banking finance companies in the retail finance space have estimated potential weak assets of around 5.4 per cent based on the dpd (days past due) approach, which is more than twice their reported gross non performing assets (of 2.4 per cent )," CRISIL said.

The difference is because loans of these finance companies are counted as NPAs when the default is 180 days or 12 months overdue, depending on the asset class. However, CRISIL's DPD approach classifies a loan as bad when default is 90 days from due date. The study looked at 12 NBFCs rated by CRISIL. Their assets totalled 142 billion rupees.

CRISIL noted that when it examined the quality of corporate loans, it analysed the credit profile of each exposure. This method was not useful to estimate credit quality of a retail loan portfolio because each loan is small in size and the portfolio involves a large number of borrowers.

Retail loans also involved repayment of principal and interest in equated monthly instalments. The DPD approach involves tracking the number of days from the due date that EMIs of a loan account is unpaid. CRISIL said the DPD measured the entire principal loan amount of the delinquent contract, and not merely the overdue portion of the loan. "It is in this treatment that the DPD approach differs from an analysis of overdue proportion where only overdues are considered," CRISIL said.

The overdue proportion approach "completely precludes the very high possibility of future occurrences of delinquencies from the contract which are currently overdue while this is adequately factored into the DPD approach," it said.