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  3. NBFCs’ NPA ratio likely to rise further in FY22 due to impact of second COVID-19 wave: ICRA

NBFCs’ NPA ratio likely to rise further in FY22 due to impact of second COVID-19 wave: ICRA

29 Jun 2021 Evaluate

Domestic rating agency ICRA in its latest report has said that nearly a third of loans by Non-Banking Financial Companies (NBFCs) are in risky segments, and the already elevated non-performing assets (NPA) ratio for such lenders are expected to rise by up to 1 percent in FY22 due to the impact of the second COVID-19 wave. Estimate on the overall assets under management (AUM) growth for non-bank lenders has been revised down to 7-9 percent as against 8-10 percent earlier by ICRA because of the setback in disbursements in the first quarter of the fiscal, impacted by the second wave.

According to the report, entities would also be faced with increased asset quality pressures as prolonged stress in the operating environment would push the gross stage3/NPAs by about 0.50-1 percent in the current fiscal; it increased by about 0.40-50 percent during the last fiscal. About 30 percent of the non-bank exposure is deemed to be in the risky segments like real estate, personal credit, microfinance, unsecured SME, and segments of commercial vehicle and passenger vehicle financing, which were more severely affected by the pandemic. It noted that geographically, large states like Maharashtra, Karnataka, and Tamil Nadu, which accounted for around 40 percent of the sectoral credit, were among the severely affected states by the second wave and witnessed tighter restrictions.

The agency further said demand for restructuring would go up in the current fiscal because of the prolonged stress in the operating environment and the non-availability of any blanket forbearance like loan moratorium. It pointed out that restructuring in the last fiscal was about 1.5 percent of the sectoral AUM. The NBFCs sector will require about Rs 2 lakh crore of additional funding if it was to meet the envisaged growth. It underlined that capitalization and liquidity profile remains a silver lining for the sector. Earnings are expected to remain under pressure in FY22 and similar to FY21 levels, as credit cost is expected to remain high and similar to the last fiscal, in the base case scenario.

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