Impact on NBFC asset quality to become clear only gradually

vehicle loans, bank of india, reserve bank of india, NPA, retail

Non-banking finance companies have managed to survive the first wave of Covid-inflicted slowdown but given the persistence of infections, full effects of lockdowns and suspension of business on their asset quality will only be known gradually, the Reserve Bank of India has said.

Among sectors NBFCs lend to, the industrial sector, particularly micro and small and large industries, were the hardest hit by the pandemic as they posted a decline in credit growth, RBI said in its latest monthly bulletin.

NBFCs in the retail loan sector stayed ahead of the curve aided by their relatively low delinquency. Incremental credit flows to retail continued to grow in the second and third quarters of FY21, led by vehicle loans, gold loans, transport and tourism.

“Players in the retail segment stayed above the curve by gauging the public sentiments and playing to their strengths,” the RBI report said. “With the persistence of the pandemic and the need for observing social distancing norms, passenger vehicles sales increased by 13.6% in December 2020. It is mirrored in the disbursal of vehicle loans by NBFCs, as these loans grew by 10.7% in Q3 2020-21. Loans against gold also grew robustly as it filled in the cash requirements and possible working capital requirements of small firms. However, incremental credit to industries declined… as the sector is yet to shake off the impact of the pandemic.”

NBFC profitability had dropped in the first quarter of FY21 due to the national lockdown. The situation improved marginally in the second quarter. NBFCs’ return on assets (RoA) and return on equity (RoE) improved to 2.3% and 12.7%, respectively, in the second quarter from 1.8% and 10.3%, respectively, a year ago.

Asset quality of NBFCs also witnessed an improvement in FY21 due to regulatory forbearance on declaring of NPAs. Gross and net non-performing asset (NPA) ratios fell in the third quarter compared to the previous year. However, the true extent of NPAs in the sector may be gauged in the upcoming quarters as the interim order by the Supreme Court on asset classification standstill was lifted only in March 2021, the RBI said.

Overall, the consolidated balance sheet of NBFCs grew at a slower pace in the second and third quarters due to challenges caused by the pandemic and lower demand for loans. NBFCs continued to disburse credit despite the disruptions.

The RBI said the future of the sector will now depend on how it copes with the second wave of Covid-19.

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