Restructuring of loans to non-bank financial institutions by March will grow by 3.3%: ICRA

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Restructuring of loan portfolios of non-bank financial groups could double to 3.1-3.3% by March 2022 from 1.6% in March 2021, affected by the second wave of Covid-19 infection that hit borrowers, rating agency said.

Covid-19 and measures to limit its spread affected the cash flow of borrowers and slowed the economic recovery. Non-bank financial institutions cover companies and housing firms (HFCs).

The Reserve Bank of India (RBI) has allowed lenders to restructure their loans while maintaining a standard asset label for 21 fiscal years. The central bank included small business, which is a key target segment for non-banking enterprises and extended the window for restructuring micro, small and medium-sized enterprises (MSMEs) until September 2021.

said the second wave had a promising rebound in non-bank fees seen in the third and fourth quarters of fiscal 21.

After recovering to pre-pandemic levels in the fourth quarter of fiscal 21, the monthly collection efficiency of retail credit rating pools fell 10-35 percent by asset class in May 2021 compared to March 2021.

Since the gradual unblocking began in June, some improvements in collection have been noticeable, but the pace is gradual, according to finance executives.

The rating agency said that portfolio restructuring of financial companies should be 4.1-4.3% by March 2022 (up from 2.2% in March 2021). They are expected to be 2.0-2.2 percent for HFCs (up from 1.0 percent in March 2021). The crime rate is generally lower for housing. They have secured products and are closely tied to basic needs, which is why borrowers are prioritizing regular repayment of home loan payments, financial sector leaders said.

As of March 2021, finance companies had a large restructuring of outstanding debt versus HFCs due to the nature of their risks.

For HFC, collateral is in the form of mortgages, while the risks of financial companies are either unsecured or collateralized by various asset classes such as vehicles, mortgages, hardware and equipment, inventories and receivables, ICRA added.

The target borrower segment also plays a key role as a high proportion of restructuring was observed in smaller companies (assets under management less than ~ Rs 5,000). Borrowers served by these institutions will have a relatively high risk profile as well as higher returns.

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