NBFCs’ vehicle loan and MFI collections hit most by Covid 2.0

Vehicle financing and micro finance segments of non banking finance companies (NBFCs) have been hardest hit as localised lockdowns and rising infections within staff have hit collection efficiencies raising the risk of non performing assets (NPAs), credit rating agency IndiaRatings (Ind-Ra) said.

Besides the problems due to the pandemic commercial vehicle owners have also had to deal with declining load factors and freight rates which along with rising diesel prices have taken a toll om their cash flows.

“Capacity utilisation has dropped significantly to 40%-60% which makes debt servicing a challenge. A similar impact has been seen by vehicles that are involved in tourist services, school bus operations, and local conveyance where a large portion of this book may already be restructured or may have slipped into NPAs,” Ind-Ra said.

The ratings company estimates that collection efficiency for vehicles deployed in goods and passenger movement declined by a whopping 45% to 55% in the second fortnight of May steadily deteriorating from 6%-7% in the first fortnight of May 2021 over April which was down by 6%-7% from March levels.

As Covid 19 infections rose in the rural areas micro finance collections have also been hit as collection efficiency in May fell 10% to 15% weakening steadily after lagging 5% in April compared to March.

“Overall, with lifting of the restrictions in some states since June first and second week, the sector on a consolidated basis could witness a collection shortfall of 15%-20% compared to March 2021. That being said, the variation among MFIs could be wider, depending on their level of concentration in regions where lifting of of restrictions could be slow,” Ind-Ra said.

The rating agency said that unlike the first wave the second wave did not give borrowers an option to restructure loans, avial government guarantee benefits or a moratorium on interest payments which was allowed during March – August 2020 helping borrowers conserve cash.

Also, unlike the first wave, even the field collection staff is exercising restraint in venturing out to collect EMIs, impacting collections. Spread of infections among NBFC employees of NBFCs also impacted operations. Ind-Ra estimates that 8%-10% of the staff comprising mostly collection and branch operation teams were infected during the second wave.

“Districts where collections are impacted more due to the health crisis rather than a clampdown could take a longer time to recover, since the pandemic may have a long-term impact on that region’s business activity and borrowers’ cash flows,” Ind-Ra said.

However, though the lower collection efficiencies have impacted the liquidity profile of borrowers, Ind-Ra said that NBFCs have sufficient liquidity buffer to withstand the stress.

“As per Ind-Ra’s assessment, even under a zero-collection scenario, NBFCs have enough liquidity to meet two to three months of debt obligations. Equity infusions in some entities have also resulted in shoring up capital buffers. Small NBFCs are relatively less leveraged and hence are able to manage the servicing of fixed obligations.”