NBFC: Weak 3rd wave impact on NBFCs as bad debts decline and collections increase

Mumbai: The third wave of Covid has not significantly harmed collection efficiency and increased delinquency levels of non-bank finance companies, rating agency India Ratings said in a report. Analysts suggest that delinquencies 1 to 90 days past due continue to be in the 5% to 15% range, and bad debt additions have slowed significantly.

“Collection efficiency data indicates a recovery in the overall operating environment. The commercial vehicle segment, where collection efficiency fell 60% to 70% in 1QFY22, has recovered and is close to pre-Covid levels,” India Ratings said.

On the microfinance lending front, collection efficiency declined by 20-25% during the second wave and has recovered significantly since then, he said.

Data on the ground suggests that the impact of the third wave may not be disproportionate, given that it is not so much a health crisis as in the second wave and the rebound shows the resilience of the segments, he said.

According to the rating agency, having learned from the impact of the first two waves, NBFCs are in a much better position to manage the possible impact of the third wave.

As the third wave spreads faster, the need for hospitalization and casualties has been less. Additionally, the health care infrastructure appears to be ready to handle the increase in numbers. The likelihood of a severe national lockdown, for now, appears low with restrictions imposed regionally.

“In the absence of any restrictions, the cash flow impact on NBFC borrowers may remain modest. Additionally, a large portion of NBFC’s weaker borrowers would have been filtered out in the first 2 waves,” said India Ratings. NBFCs witnessed a national lockdown for three weeks in the first wave and regional lockdowns in the second wave.

According to the rating agency, large NBFCs have strong balance sheet buffers to absorb the impact of any disruptions. Entities have sufficient liquidity to meet at least three months of debt repayment, as well as easy access to capital markets and banks to raise funds.

“An increased focus on collections and a reduced disbursement rate has helped NBFCs conserve liquidity,” he said. “They also protected their balance sheet by building higher provisions on non-performing advances and standard assets to shield the impact of the cost of additional credit.”