NBFC Q1 collections to be hit hard by 2nd COVID wave: India Ratings

Non-bank finance companies (NBFCs) in India could see a major impact on their collections in the first quarter of FY22, owing to lockdowns during the COVID-19 second wave, India Ratings and Research said.

The credit rating firm has said the field collection staff is exercising more restraint in collecting EMIs during the second wave compared to the first wave. This in turn has severely hampered collection efficiency across asset classes, especially cash-based collections along with the recovery from overdue cases.

The firm has also found that 8-10 percent of the professionals involved in collection and branch operations were infected during the second wave.

According to the firm’s assessment, there was a sharper fall in collections across the southern states in May owing to a delayed lockdown, as against states in the northern belt, which bore the brunt in April. States that faced a severe lockdown and are better equipped to manage the pandemic are expected to have an early revival in collections, though they might see a severe dip in collections in May 2021.

As the pandemic may have a long-term impact on business activity and borrowers’ cash flows, places where collections were impacted more due to the health crisis rather than the curbs, could take longer to recover, said the firm.

In the second half of FY21, there was an improvement in the monthly collection efficiency numbers due to the recovery of past dues along with some part of the book being restructured or given Emergency Credit Line Guarantee Scheme (ECLGS) benefit. Plus, the moratorium, which was given between March-August 2020, helped borrowers to conserve cash for repayments.

Unlike the first wave, which mostly hit urban areas, the second wave has had a widespread impact across rural and urban areas. With rural markets being affected, the microfinance institution (MFI) sector’s collections in April 2021 lagged 5 percent compared to March 2021, which in turn had a 3-5 percent collection shortfall. As states intensified their lockdown measures, there was a sharper drop of 10-15 percent.

Vehicle financiers faced a steep decline in collections owing to less load availability. A decline in freight rates and a rise in diesel prices have affected the cash flow of commercial vehicles. Plus, there was a 40-60 percent drop in capacity utilisation, which made debt servicing a bigger challenge.

The agricultural equipment segment has benefitted from a reasonable agricultural output. However, tractors deployed for non-agricultural activities suffered during the pandemic, affecting the cash flows. With various states shutting down Agricultural Produce Market Committee (APMC) markets, trade activities were hit.

Small and medium enterprise/loan against property (LAP) is already facing heightened delinquencies. Business cash flows have been impacted due to the restrictions, migration of labour and workers contracting COVID-10. However, the impact in this segment would be low due to the continuous operation of businesses engaged in essential services. Customers in this segment also have a better credit profile than small road transport operators or small commercial vehicle borrowers. Borrowers in hospitality, textiles, gems and jewellery and tourism have been impacted more compared to the ones in the pharmaceuticals, metals, and FMCG sectors.

The housing segment remained resilient during the pandemic. There is no material difference in the collection efficiencies of May and April. On the affordable housing front also, collection efficiencies have been more than 90 percent in April and May.