Non-banks face more volatile situation

While most of the key target asset segments faced subdued demand related headwinds and some non-banks also faced funding constraints that impacted growth in the current fiscal, the COVID-19 related slowdown in economic activity would further aggravate the already subdued demand environment.

Giving this overview, ICRA feel that the impact on their business levels in March 2020, which typically witnesses robust levels of disbursements, leading to slower-than-envisaged growth in the current fiscal.

Further, since a large section of the people are facing movement and business-related restrictions and are postponing non-discretionary spending, this has led to a fall in the economic activity, observed ICRA.

The cash flow and liquidity position of many borrowers (individuals, small businesses and corporates) are likely to get affected, impacting their debt servicing capabilities.

The impact would be more prominent on self-employed borrowers, the daily wage workforce, and small businesses (non-essentials).

Non-banks largely cater to the self-employed borrower segment in the retail space, where the cash flows are expected to be more volatile in the current situation vis-à-vis their salaried counterparts.

Other non-bank (non-retail) exposures are to entities or SMEs with relatively moderate risk profiles, which accentuates their credit risk in the current scenario.

Further, most of these borrowers have limited funding avenues and typically don’t have banking relationships for their credit requirements.

Non-banks, which are already facing funding constraints and an expected increase in delinquencies, are likely to focus more on collections at least in the near term.

Therefore, lack of supplementary credit funding could have a significant negative impact on these borrowers as their cash flow mismatches would compound with the passage of time.

If the COVID-19-related movement and business restrictions continue for a longer period (i.e. 2-3 months) vis-à-vis the current expectation of a few weeks, the impact would be more adverse.

While all non-banks are facing significant headwinds because of the currently evolving situation, their ability to keep the asset quality under control would be the key differentiator.

The typical March/Q4 pullback in asset quality, which is witnessed by most players, may not be visible in Q4 FY2020 and overdues are expected to remain elevated at least in the near term.

A deterioration in the asset quality could further stifle the fund flow to the sector as bank credit to the sector is already high and funding

from other sources like mutual funds, insurance, FIIs, etc, are likely to be quite muted vis-à-vis the levels witnessed so far in the current fiscal.

ICRA’s outlook for non-banks is, therefore, negative at present, as the business growth and all key performance parameters (asset quality, solvency, liquidity, earnings) are expected to weaken over the next 1-2 quarters and recovery in the latter part of the next fiscal would depend on the overall economic turnaround.

However, during this period, the capitalisation profile is expected to remain adequate from a regulatory and solvency perspective, notwithstanding the weakening, believes ICRA.

The overall non-bank advances are estimated at about Rs.35 trillion, as of September 2019, with exposures ranging from retail individual borrowers to large corporates.


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