Non-bank lenders are likely to report better asset quality in the March quarter on the back of stronger collections and making provisions under the new bad loan classification norms in the previous quarter itself.
However, analysts pointed out that non-banking financial companies (NBFCs) would now tighten their collection standards and discourage borrowers from crossing 90 days of non-repayment to meet the new regulations. The Reserve Bank of India has been bringing NBFCs on a par with banks in terms of regulations, and aligning their bad loan classification standards is another aspect of this harmonization.
Gross non-performing assets of NBFCs increased to 6.8% as on 31 December 2021, rising 150 basis points (bps) over 30 September 2021, according to an analysis by Crisil Ratings. The rating agency expected NBFCs to report a 150-200 bps reduction in bad loan ratio by 31 March. One basis point in 0.01%.
The new norms mandate non-bank financiers to upgrade a loan from the non-performing to standard category only after all pending dues are repaid, instead of allowing reclassification based on part payments. In February, RBI extended the deadline to comply with the new norm by another six months to 30 September.
“Our sense is that with these asset quality rules, NBFCs will become tighter in terms of their collection standards and early delinquency would be looked at far more closely,” said Prakash Agarwal, director and head of financial institutions, India Ratings and Research.
Historically, NBFCs used to classify a loan as bad after 180 days of non-repayment, which was gradually brought down to 90 days. Non-banks used to discourage customers from moving beyond 180 days of non-repayment and now they would make it tighter for customer to cross 90 days, Agarwal said, adding that he does not expect any sharp spike in reported bad loan numbers in the June or September quarters either.
Most large NBFCs had already revealed the impact of RBI’s new asset classification norm in the December quarter results since the extension came only in February. Analysts at ICICI Securities pointed out that many lenders indicated they would intensify collection intensity from 61-90 dpd (days past due) bucket to 31-60 dpd bucket. Dpd indicates the number of days repayment on a loan is overdue.
“New collection rhythm would, however, take three-four quarters to normalize, and convergence of NPA and stage-3 would be possible thereafter,” ICICI Securities said in a report on 6 April. Non-performing assets are termed stage-3 loans under the Ind-AS accounting standard used by NBFCs.
Business performance for non-bank lenders for the three months through March would likely see sustained traction in disbursements and improvement in collection efficiency resulting in better pre-provisioning operating profit, according to ICICI Securities.
Analysts expect NBFCs to post higher aggregate earnings on better loan growth and lower provisioning in the March quarter. Lenders focusing on financing small businesses, microfinance and commercial vehicles are out of woods with improvement in customer cash flows, according to a report by brokerage firm Prabhudas Lilladher.
Asset quality stress should ease as collection efficiencies have even crossed 100% in many companies, analysts believe.
“Secured lending business such as gold and housing finance companies can see margin pressure, due to increased competition. We reckon provisioning has peaked out and credit costs should likely return to pre-covid levels in coming quarters,” the Prabhudas Lilladher report said on 12 April.
With the pandemic receding and the economy opening up, Q4 can be extremely strong for NBFCs across the board, it said.
Companies are expected to show strong sequential growth of assets under management and their guidance is expected to be strong.