India Ratings maintains negative outlook on NBFCs, HFCs for H2 FY21

Domestic rating agency India Ratings and Research on Thursday said it has maintained a negative outlook on non-banking financial companies (NBFCs) and housing finance companies (HFCs) for the second half of 2020-21.

It said growth in assets under management would be flattish for NBFCs as against its earlier estimate of 8-10 per cent y-o-y, and in lower single digits for HFCs in 2020-21.

"We have maintained a negative outlook on the non-banking finance company (NBFC, retail and wholesale) and housing finance company sectors for 2HFY21, amid Covid-19 related business disruptions," the rating agency said.

It said that considering the unabated spread of the virus at pan-India level, time required for NBFC operations to return to normalcy could be prolonged.

Although the liquidity and funding environment has improved for better-rated entities after July, there would be asset quality issues impacting overall profitability in 2020-21 and beyond, it said.

The sector's capitalisation remains reasonable, given the muted growth outlook, to absorb moderate asset quality stress, it said.

According to the agency, NBFCs have increased their focus on collections and have tightened underwriting standards, and so portfolio growth would take a back seat.

The Reserve Bank of India (RBI) has allowed lenders to restructure their book which was not more than 30 days past due as on February 29, 2020. The credit cost that has to be provided on the restructured book is higher of 10 per cent or extant provisioning held on those assets.

"To that extent, there could be some relief on credit costs; however, slippages could be higher for certain segments, resulting into higher credit costs," the agency said.

For NBFCs, the proportion of restructured book of the total assets under management could be in high single digits. Some of the segments which can witness higher asset quality pressure are commercial vehicles (CV), real estate loans and big ticket loans to SMEs, it said.

The agency has maintained a negative outlook on CV as an asset class for the second half of this financial year.

It expects limited business revival for MSMEs and, hence, has maintained business loans on a negative outlook.

It has revised its outlook for tractor loans to stable for the second half of 2020-21 from negative.

"The debt servicing capability of tractor loan borrowers has improved because of three good consecutive harvests, favourable monsoons and increased rural expenditure outlay budgeted by the government," it added.

The agency has a negative outlook for the second half of 2020-21 on microfinance loans.

While it has a negative outlook on most of the asset classes, the rating agency has maintained a stable outlook on securitisation transactions for the second half of 2020-21. It was backed by home loans, vehicle loans, secured business loan (loans against property) pools, given the seasoning and credit enhancement build-up in these transactions.

However, it has revised its outlook to negative from stable for the securitisation transactions backed by microfinance loans, unsecured business loans and construction equipment loans because of the uncertainty around slippages after moratorium.