NBFCs’ Wholesale NPAs To Jump As Moratorium Lapses, Says Crisil

Stressed assets of non-bank lenders are expected to rise in the near-to-medium term as an increasing proportion of their loan book comes out of moratorium, according to Crisil.

“The principal moratorium is estimated at 50-70 percent of assets for some non-banks, going as high as 90 percent in some cases,” Crisil said in a note on Thursday. “As the moratoria lapse, slippages will manifest.”

The Reserve Bank of India in its June 7 circular had said once a borrower is reported to be in default by any lender, they may review the account within 30 days from the day of default. Lenders must resolve over Rs 2,000 crore non-performing assets within 180 days, the central bank had said.

The real estate sector is experiencing “significant headwinds”, the rating agency said, adding that the financial flexibility of many underlying operating companies in the structured debt space has been impacted due to the overall slowdown in their business.

Wholesale loan book of non-bank lenders and housing finance companies contracted 3-5 percent in the first half of financial year 2019-20. It had shrunk 2 percent in the second half of FY19 and posted 11 percent growth in the first half of FY19. Between FY16 and FY18, it had clocked a compounded annual growth rate of 32 percent.

The contraction, according to Crisil, is largely due to the liquidity crunch since September last year, led by confidence deficit amid concerns over asset quality in the wholesale loan book—including real estate financing, structured credit and promoter financing. With disbursements sluggish in the first half of this fiscal, prospects for the current year are subdued, the rating agency said.

Funding Concerns

Interest from institutional investors in the debt market has remained tepid and a significant reversal in this trend is unlikely in the near term, Crisil said, cautioning that even bank funding has not yet fully bridged the gap.

Retail-focused non-bank lenders with strong credit profile and sound liquidity have managed to access funds and have reported growth, while others haven’t, the report said. “Wholesale-oriented standalone non-banks face relatively higher confidence deficit because of lingering concerns about asset quality.”

The rating agency cited commercial paper issuances by non-bank lenders to validate this trend. “Issuance of CPs by non-banks with strong parentage in recent months has bounced back close to the peak average issuance of June-August 2018. However, commercial paper issuances by non-banks without strong parentage—especially wholesale-oriented NBFCs and HFCs—have wilted, plunging as much as 90 percent in certain cases,” it said.

To be sure, a part of this reduction can be attributed to non-banks consciously going slow on commercial paper issuances to improve their asset-liability maturity profiles.

“Even as the ALM profile has improved for many non-banks, funding access challenges continue as market concerns have shifted towards asset-quality metrics. Apprehensions over the asset quality of wholesale-oriented standalone non-banks are not unwarranted,” Crisil said. “A significant portion of the exits for non-banks in the past was through refinancing. The current economic environment poses challenges in this regard, although some good quality assets will still draw interest from investors.”