Fintech-NBFCs to Face Litmus Test in FY2021: Ind-Ra
Financial year (FY) 2021 could prove to be the year of reckoning for small non-banking financial institutions (NBFCs) because of the ongoing business disruptions caused by the COVID-19 pandemic. This is especially for the new-age NBFCs that use technology substantially across the loan management cycle, i.e. financial technology NBFCs (FT-NBFCs), says a research note. 
 
In a report, India Ratings and Research (Ind-Ra) says, "FT-NBFCs could be more disproportionately impacted than any other financial institution, given their borrower profile, majorly micro, small and medium size enterprises (MSMEs) and largely unsecured lending. In few cases, borrowers may also have leverage from traditional lenders and FT-NBFCs may have plugged the additional short-term borrowing needs."  
 
The ratings agency has rated three FT-NBFCs, which it feels do not have immediate liquidity challenges. However, it says, they are likely to face elevated asset quality issues if MSME mortality intensifies with the extension of lockdown, followed by a slow recovery of overdues and refinancing and funding challenges in the short term.
 
While Ind-Ra rated FT-NBFCs in the investment grade (three) have sufficient liquidity to cover liability obligations for two-three months, assuming nil inflows and no moratorium, this also in Ind-Ra’s opinion may damage the short-mid-term fund raising capabilities as risk aversion intensifies. 
 
Cumulatively, Ind-Ra rated FT-NBFCs have a total debt outstanding of around Rs30.0 billion, of which 50% of debt is funded by banks and financial institutions, which may curtail funding or refinancing to NBFCs for the short-to-medium term, given concerns on the asset side. Moreover, many banks still are uncertain providing moratorium to these NBFCs. 
 
Ind-Ra says it also does not expect material inflows to these NBFCs via the targeted long-term repo operations mechanism since most of them are in the lower investment grade. However, they might receive some support from the refinance policy institutions, especially given that Rs0.5 trillion would be provided to these institutions for the MSME segment, it added.
 
According to the ratings agency, during FY2021, credit growth for FT-NBFCs would be muted and it would focus more on recovery of overdues. 
 
Over FY2018 to first nine months (9M) of FY2020, the assets under management (AUM) of Ind-Ra rated FT-NBFCs grew at a CAGR of around 50% to Rs50.0 billion, with loans to MSMEs and SMEs (unsecured business loans) and merchant cash advance accounting for around 85%. 
 
"They may lose out on more than a month’s revenue and also see a slow revenue recovery," the ratings agency says, adding, "This could also be aggravated by the loss of business opportunities and lower demand. The merchant cash advance product (daily repayment product) offered by some FT-NBFCs is likely to have minimal collections in the near-term, especially because discretionary spending could take longer and consumers may downscale in the short term." 
 
"The overhang could be partially offset by the fact that collections are digital and if there are bank balances, the payment can be ‘pulled’. About 60% of the borrowers of Ind-Ra’s rated FT-NBFCs have already availed a moratorium and additionally 10%-20% may avail one, hence, even MSMEs operating in essential goods and services, which may have their cash flows intact, may prefer to delay the payments on account of an uncertain end to the lockdown," it added. 
 
In addition, Ind-Ra says, these are mainly proprietor-driven businesses that are often the only source of income for the family. Hence, in it’s view, an immediate and main focus of NBFCs will be to recover overdues to minimise the credit costs, further affecting the profitability, it added. 
 
According to the ratings agency, some FT-NBFCs may also re-strategise and revise their operating models and underwriting practices and conserve near-term liquidity, further contributing to the likely muted credit growth for FY2021.
 
Most FT-NBFCs operate at yield plus fee of 23%-25% and are operating at higher end of the yield curve, implying the credit risk is the highest. "In view of the FY2021 muted credit growth, the pre-provisioning operating profit (PPOP) could come under pressure due to high fixed costs (10%-16% of AUM) on which these entities are operating. Also, these NBFCs have been incurring credit costs between 3%-6% which is likely to increase for near-term," the ratings agency says. 
 
It says, "Any reasonable data-based estimates on credit cost would require collection data over the next four months; two months of moratorium period and two months of normal repayment environment. These entities are operating at a lower PPOP due to the high operating fixed costs, as the operations are expected to breakeven at a certain AUM level, and on steady state basis would report a PPOP in range of 7%-9%. However, considering the current scenario, some of the entities may not be able to achieve the economies of scale and the credit costs may further increase by 2%-3%, which could exceed PPOP, further leading to net losses in the near-term." 
 
Ind-Ra says its rated FT-NBFCs maintain adequate capital buffers and low leverage levels, with Tier I capital adequacy ratio at 30%-32% and debt and equity below 3.0 times, which is conducive for favourable asset liability management. It says, "This is also necessitated as they operate at the higher end of the yield curve and their steady state credit costs are at least twice of higher rated asset financing NBFCs."
 
"Historically, these FT-NBFCs have capped maximum leverage levels at 4.0 times and have been continuously supported with capital infusions by its equity investors for breakeven of operations, absorption of credit costs and growth prospects; however, in the Ind-Ra’s view, in this challenging environment, it may be difficult to conceive substantial equity support from the investor community as well," the ratings agency concludes.
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    Asset Quality Issues To Surmount for MFIs & SFBs due to Lockdown: Ind-Ra
    Microfinance institutions (MFIs) and small finance banks (SFBs) are likely to face severe asset quality issues in the short term, as near-term collections would see unprecedented disruptions on account of the COVID-19 linked nation-wide lock-down, says India Ratings and Research (Ind-Ra).
     
    In a report, the ratings agency says, "While our rated non-banking finance company (NBFC)-MFIs in the investment grade category have adequate liquidity for one and a half to six months (assuming nil collections and no moratorium), there may be refinancing and funding challenges for some entities in the next three-six months. SFBs would face similar risks on the asset side and managing deposits base may also become challenging. However, they would be better placed on the liability side by virtue of them being banks where the Reserve Bank of India (RBI) is the lender of the last resort. As a result, Ind-Ra revised its outlook on NBFC-MFIs and SFBs from stable to negative."
     
    According to Ind-Ra, the asset quality concerns on NBFC-MFIs are driven by COVID-19 situation in India. It says, "MFIs are among the hardest hit in the initial period of the lock-down; their field staff cannot go for collections. Given that collections mostly happen in cash, they may fall drastically in April 2020 before seeing a modest recovery in May 2020 if the lock-down is lifted. The recovery could be on account of a significant share of the borrowers being involved in providing essential goods and services, so cash flows would not dry up for them." 
     
    "Also, a section of the borrowers would have low debt outstanding as their loans would have run down and they would repay to avail the next cycle of loans. If MFIs are unable to disburse the next cycle of loans to such customers, this could aggravate the collection issues. This could also be contributed by homogeneity in borrower behaviour, loss of business opportunities and lower demand," it added.
     
    Ind-Ra has brought down its estimates for gross domestic product (GDP) growth to 3.6% from 5.5% for FY20-21.
     
    Speaking about the demonetisation experience, the ratings agency says, during that time, while the immediate disruption was high in north, west and central India, east and south were performing better. 
     
    It says, "The states of Uttar Pradesh, Maharashtra and Madhya Pradesh, where there were local and state elections, the collections did not return to normal and MFIs wrote off a large portion of the portfolio (e.g. in Maharashtra, MFIs wrote-off up to 50% of their exposures) over FY2017-FY2019. Overall, credit costs for impacted institutions (including SFBs) were in the range of 5%-10%, depending on state-wise portfolio distribution."  
     
    "The impact of the lock-down is nationwide and hence precedencies may not necessarily hold. Any reasonable data-based estimates on credit cost would require collection data over the next four months, including two months of moratorium period and two months of normal repayment environment. However, the credit costs could exceed pre-provision operating profits of about 4%-6% for NBFC-MFIs and they could see some capital erosion," Ind-Ra added.
     
    Ind-Ra says while its rated NBFC-MFIs in the investment grade (six) have sufficient liquidity to cover liability obligations for one and a half to five months, it could take much longer for the credit support to normalise, considering domestic banks to be the dominant fund supplier to most MFIs and banks may curtail funding/refinancing to MFIs for the short-to-medium term, given the uncertainty towards inflows, if the lock-down is extended. 
     
    "Cumulatively," it says, "NBFC-MFIs will have to forgo two months collections of around Rs26 billion, which is almost equivalent to the cumulative liquidity that they currently hold on the balance sheet. This situation has aggravated, as most of the banks still are uncertain in terms of passing the moratorium benefits to NBFCs. While the RBI has announced targeted long-term repo-operation 2.0 of Rs500 billion for NBFCs, half of which is targeted for small and mid-sized NBFCs and MFIs, the banks’ appetite to flow the same remains uncertain."
     
    For small finance banks, while the deposit accretion is slow, it have multiple tools available, the ratings agency says. 
     
    There have been a few important observations regarding most small SFBs that Ind-Ra has direct or indirect coverage on over the last few months. "While they were accruing deposits at break-neck speed (FY2019 and first half (1H) of FY2020 growth), the deposit accretion almost stopped in March 2020 and in fact there was deposit attrition as the banks faced perception issues on account of the Yes Bank Ltd reconstruction and Punjab and Maharashtra Cooperative (PMC) Bank issues," it says. 
     
    The rollover of deposits was also minimal, the ratings agency says, adding, "These SFBs raised INR63 billion of deposits in 4QFY19, while only Rs23 billion in 4QFY20. The initial management commentary is that the renewal rates have picked up in April 2020. We also expect that their exposures to MFIs to have an overhang on deposit accrual and deposit rollover or renewal." 
     
    "Overall, the SFBs have provided a two-month moratorium period to most of its individual or MSME borrowers. They do have access to refinance institutions and as banks, to additional tools to raise non-deposit liabilities to manage their asset-liability management. Moreover, SFBs maintains an excess statutory ratio in the range of 5%-10% of the total assets which supports its liquidity position, and have built retail deposits, including current account savings account deposits, in the range of 30%-35% of the total funding reflecting granular deposit base," Ind-Ra added.
     
    For SFBs, the asset side risks are somewhat lower than NBFC and MFIs, the ratings agency says, adding, "On the asset side, most SFBs have exposure to microfinance borrowers and could be exposed to similar risks as NBFC-MFIs. However, given that many of these borrowers would also have deposits with banks, especially recurring deposits that are collected with their loan repayments, these SFBs have seen lower delays with such borrowers in their pilots; the lock-down and its aftermath would be a big testing ground for that." 
     
    "Although most SFBs have majority MFI exposure as a per cent of its loan book, they also have non-MFI exposure – loan against property, MSME and SME loans and vehicle financing. This portfolio is also expected to get impacted due to the lock-down as these banks mostly serve the self-employed segment with median credit profiles. We expect that the banks would face delinquencies and challenges on the asset front, this would hamper deposit accretion at least for the next three to six months. This and the overall environment could slow down the growth of SFBs significantly," the ratings agency concludes.
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    COMMENTS

    Ramesh Popat

    6 months ago

    so one should not recommend sfb like equitas.

    ED Attaches Prakash Vanijya's Properties Worth Rs175 cr in Bank Fraud Case
    The Enforcement Directorate (ED) on Monday said that it has attached 124 immovable properties valued at Rs175.29 crore of Prakash Vanijya Pvt Ltd and others for defrauding Central Bank of India to the tune of nearly Rs 235 crore.
     
    An ED official said that the financial probe agency attached the properties under the Prevention of Money Laundering Act, 2002 (PMLA), including landed properties and business establishments in the name of the said firm and other associate companies.
     
    "Among these, 10 properties are in West Bengal's Kolkata, worth Rs67.19 crore, three in Jalpaiguri wirth Rs98.70 crore and 111 in Chhattisgarh worth Rs9.40 crore.
     
    He said these properties were traced after analysing the layered transactions during the investigation.
     
    The ED registered a case of money laundering against Prakash Vanijya Pvt Ltd, its Director Mannoj Kumar Jain and other on the basis of a charge sheet filed by the CBI for alleedly defrauding Central Bank of India of Rs234.57 crore.
     
    The official said that investigation revealed that the letter of credit (LC) facility got sanctioned by Jain was misused. These LCs were issued by using fictitious and shell companies and without any actual business or trade.
     
    "The LCs so opened were discounted by Mr Jain through fictitious beneficiary companies and funds received back by him by round tripping through his shell companies," the official said.
     
    The ED official claimed that funds released by the bank were used for 'personal purpose' and for 'settling' other liabilities through kite-flying operations.
     
    "It was also revealed that after availing of credit facilities from the bank, the accused started acquiring immovable properties. The purchase price of these properties were highly undervalued and the balance amount paid in cash," the ED official said, adding this cash was illegally generated out of the money defrauded from the Bank.
     
    He claimed that some of these properties were then offered as collateral securities to the Bank for enhancing the credit limit.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

     

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    COMMENTS

    rajoluramam

    6 months ago

    The same storey of Nirav Mody But a smaller version. Once bitten, twice shy. Why the banks are not shy? Some extraneous considerations like political influence, bribes taken by the banks. When the documents clearly show how the money was defrauded by the company clearly, why we are taking so much time to punish the culprits. Is months together investgations are needed?

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