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COVID-19 related disruptions raise concerns over NBFCs retail loans: Study

The restrictions on movement imposed by various states due to surging COVID-19 cases are likely to affect collections of non-banking finance companies and housing finance companies and may pose risks to the asset quality of their retail loans, according to a report.

With an exponential rise in coronavirus cases, the Maharashtra government on Wednesday placed stringent restrictions, including travel within the state. The Delhi government has also imposed a curfew till April 26.

“The rising COVID-19 cases in April 2021 has again raised concerns on the asset quality of the retail loans of NBFCs and HFCs given the increasing instances of lockdowns in various cities coupled with a gradual rise in severity of such restrictions by some state governments,” Icra Ratings said in a report.

The restrictions on movement would have a bearing on collection efforts for the NBFCs, especially for microfinance loans where cash collections still remain dominant, it added.

Its vice president and head (structured finance ratings) Abhishek Dafria said, “While it is too early to comment on the extent of the impact on the asset quality of retail loans due to the rising COVID cases, there is reason to be cautious”.

The report said commercial vehicle loans could also face stress if the inter-state restrictions are re-imposed, though even the current restrictions put in place in key geographies like Maharashtra and Delhi, where non-essential services are closed would lead to the lower fleet utilisation for the operators.

Housing loans are expected to remain most resilient as was seen even last year given the secured nature of the asset class and the priority given by borrowers to repay such loans, it said.

Dafria said post the nationwide lockdown last year, a severe drop in collections was witnessed for most asset classes, though the availability of a moratorium provided a breather from an NPA-recognition perspective.

The restrictions at present are localised and less harsh, but the severity has been gradually increasing as the surge in COVID cases is yet to be brought under control, he said.

In Icra-rated securitisation transactions, we had seen microfinance and unsecured SME loan pools report the highest delinquencies last year post the end of the moratorium period, followed by vehicle loan pools and then the housing loan/loan against property pools, he added.

“In our view, the risk categorisation would remain similar in the current environment, but the geographical concentration of pools to regions where COVID cases are relatively higher and thus government restrictions are severe would matter more from a risk perspective,” Dafria said.

Following the second wave of the pandemic, the agency expects securitisation volumes to again get impacted in Q1 FY2022 as NBFCs and HFCs will be more selective in fresh lending thereby reducing their financing needs while the investors for securitised pools may again exhibit a ‘wait and watch’ approach.

Securitisation volumes had dropped to a quarterly record low of around Rs 7,500 crore in Q1 FY2021 due to the nationwide lockdown though it witnessed sequential growth in subsequent quarters, achieving volumes of Rs 40,000 crore in Q4 FY2021.

Dafria said if the rise in COVID cases is brought under control soon with limited impact on the economic activities, the overall securitisation volumes is expected to witness a 40-50 per cent year-on-year increase in FY2022, with a high proportion of securitisation happening in the second half of the fiscal.

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