Bombay : Non-bank lenders are expected to report improved asset quality in the March quarter thanks to stronger collections and provisioning under new bad debt classification standards in the prior quarter itself .
However, analysts have pointed out that non-bank financial companies (NBFCs) will now tighten their collection standards and discourage borrowers from going through 90 days of non-repayment to comply with the new regulations. The Reserve Bank of India has put NBFCs on a par with banks in terms of regulation, and the alignment of their bad debt classification standards is another aspect of this harmonization.
NBFC gross non-performing assets increased to 6.8% as of December 31, 2021, up 150 basis points (bps) from September 30, 2021, according to analysis by Crisil Ratings. The rating agency expected NBFCs to report a 150 to 200 basis point reduction in the bad debt ratio by March 31. One basis point at 0.01%.
The new standards require non-bank financiers to upgrade a loan from the non-performing category to the standard category only after all pending assessments have been paid, instead of allowing reclassification based on partial payments. In February, RBI extended the deadline to comply with the new standard for another six months until September 30.
“Our feeling is that with these asset quality rules, NBFCs will become stricter in terms of collection standards and early defaults will be scrutinized much more closely,” said Prakash Agarwal, Director and Head of Financial Institutions, India. Ratings and Research.
Historically, NBFC would classify a loan as bad after 180 days of non-repayment, which was gradually reduced to 90 days. Non-banks used to discourage customers from going past 180 days of non-refund and now they would make it harder for customers to go through 90 days, Agarwal said, adding that he does not expect a sharp increase in the number of impaired loans reported in June. nor the September quarters.
Most major NBFCs had already disclosed the impact of RBI’s new asset classification standard in the December quarter results since the extension only came in February. Analysts at ICICI Securities pointed out that many lenders have indicated that they will step up collection intensity from 61-90 dpd (days past due) to 31-60 dpd. Dpd indicates the number of days past due in repayment of a loan.
“However, it would take three to four quarters for the new collection rhythm to normalize, and the convergence of NPA and Stage 3 would be possible thereafter,” ICICI Securities said in an April 6 report. Non-performing assets are referred to as Stage 3 loans under the Ind-AS accounting standard used by NBFCs.
According to ICICI Securities, the business performance of non-bank lenders for the three months to March would likely see sustained traction in disbursements and improved collection efficiency, which would translate into better operating profit before provisioning. .
Analysts expect NBFC to post higher overall earnings on the back of better loan growth and lower provisioning in the March quarter. According to a report by brokerage firm Prabhudas Lilladher, lenders that focus on financing small businesses, microfinance and commercial vehicles are running out of steam with improved customer cash flow.
Asset quality stress should ease as collection efficiency has even exceeded 100% in many companies, analysts say.
“Secured lending businesses such as gold and housing finance companies may come under pressure on margins, due to increased competition. We believe provisioning has peaked and credit costs are likely to return to pre-covid levels over the next few quarters,” Prabhudas Lilladher said on April 12.
With the pandemic receding and the economy opening up, the fourth quarter can be extremely strong for NBFCs across the board, he said.
Companies are expected to post strong sequential growth in assets under management and their forecasts should be strong.