Decline after uptick! Spike in overdues impacts NBFC performance in Q1 FY2022

After witnessing an uptick in Q3 FY2021 and Q4 FY2021, disbursements for non-banks declined again in Q1 FY2022, as expected, and was down by about 55% on a sequential Q-o-Q basis.

According to analysis by ICRA while disbursements revived quite sharply in July 2021 on the back of the pent-up demand, sustainability of the same would depend on the broader macro-economic indicators.

Given this subdued disbursements and portfolio rundown in the absence of any moratorium like in Q1 FY2021, the asset under management (AUM) for NBFC-segment shrunk in Q1 FY2022, while the HFC AUM remained flat.

Manushree Saggar, Vice President and Sector Head, Financial Sector Ratings, said, "The second wave has temporarily pushed back the revival for the sector. As a base case, ICRA expects overall disbursements for FY2022 to be higher by about 6-8% on a Y-o-Y basis, on the back of the two consecutive years of Y-o-Y contraction. From an AUM perspective, the sector is expected to grow at 8-10% in FY2022. Growth would be driven by the improvement in demand from all key target segments vis-a-vis FY2021, on the back of a low base."

The asset quality for the non-banks entities weakened quite sharply in Q1 FY2022 because of the localised lockdowns imposed by various states on account of the second wave of Covid-19 infections, which impacted the collection process of these entities. The jump in overdues was the sharpest in the recent past, as borrower level liquidity got stretched as there was no loan moratorium unlike in the last fiscal.

About 45% of the NBFCs loans had availed of the moratorium as of August 2020 and largely from the individual and the MSME loan segments. It also impacted the fragile recovery in the borrower cash flows, which were affected by the pandemic in the last fiscal. The marginal borrowers, therefore, slipped into the NPA /overdue category during Q1 FY2022.

The headline asset quality numbers are expected to moderate as the trend in the collection efficiencies (CE) continues to remain encouraging.

ICRA expects a 50-100 bps increase (net of recoveries and W/offs) in the overdues in FY2022, assuming there are no further Covid-19 induced lockdowns.

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"While asset quality pressures persist, the increase in the overall provisions, which currently is 1.7x the pre-Covid levels (Dec-19), provides some comfort. This would give the entities adequate leeway to technically write-off and clean up their balance sheets. In this context, it is worth noting that write-offs remained high in Q1 FY2022, but lower than the levels witnessed in Q3 and Q4 FY2021. Nevertheless, given the uncertainties in the operating environment, write-offs are likely to remain high in FY2022 and similar to the last fiscal (2.4% of AUM for NBFCs and 0.3% for HFCs)", Saggar added.

NBFC credit costs spiked sharply in Q1 FY2022 as write-offs remained elevated and provisions went up in view of the increase in the overdues. While HFC NPA/Stage 3 also increased during the period, credit costs moderated vis a vis Q4 FY2021 as provisions did not go up sharply like the NBFCs and write-offs were negligible. Consequently, net profits plunged during the quarter to the lowest level in the recent past.

"Assuming there are no further lockdowns, ICRA expects the earnings performance to improve in the subsequent quarters as credit costs would moderate with the reduction in overdues from June 2021 levels. The pre-tax return on average managed assets (PBT%) for FY2022 are likely to remain similar to FY2021 levels (NBFC- 2.4-2.6% and HFC -1.9-2.1%). Optimistically, if the collection efficiency trends post a steady and healthy revival and if slippages remain contained, then PBT% may also benefit from reversals in provisions," Saggar reiterated.