Retail-NBFC Credit Trends

April 2020
Outlook turns Negative – COVID-19 to have lasting effect on
segmental performance

Growth slowed in Q3 FY2019;

Karthik Srinivasan
earnings to build up if tightKarthik
+91 22 61143444
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A
Karthik Srinivasan
M
liquidity
+91 22
Retail-NBFC Credit Trends
pressure on asset quality and
A M Karthik
61143444continues +91 44 45964308
Govindaraj Prabhu M
+91 44 45964306
+91 44 45964308

karthiks@icraindia.com
karthiks@icraindia.com
a.karthik@icraindia.com
March 2019
a.karthik@icraindia.com govindaraj.m@icraindia.com
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 CONTENTS

1. Executive Summary 03
2. Update on Retail-NBFC Credit Trends 06
Retail NBFC credit growth to dip in FY2020 and to be significantly crippled in FY2021 07
Asset quality continues to weaken 09
Adequate liquidity; share of ST borrowings reducing steadily; Covid-19 related impact is a monitorable 10
Profitability to come under pressure as credit cost is set to increase and as growth moderates 11
Adequate capital profile as growth would slow 12
3. Covid-19 Impact on Non-banks 13
Segmental asset quality outlook 15
Impact on solvency profile of Non-banks 21
Impact on profitability profile of Non-banks 22
4. Key Regulatory Developments Impacting Non-banks 23
5. Non-bank Funding Update 31
6. ECBs raised by Non-banks 35
7. Retail Asset Class-wise Trends 42
Commercial vehicle finance 43
Passenger vehicle finance 47
LAP & SME credit 49
Gold loans 50
Two-wheeler finance 52
Tractor finance 54
Construction equipment finance 56
8. ANNEXURE 1: List of Key NBFCs rated by ICRA (excluding MFIs and infra) 58
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 Executive Summary
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 Outlook – Negative

The slowdown induced by Covid-19 has further accelerated the slide in the performance of retail-
focussed non-banking financial companies (Retail-NBFCs), which were already facing muted demand
and were dealing with the emerging asset quality related concerns. In line with ICRA’s revision of the
GDP growth rate for Q4 FY2020 (to ~2.4%) and for FY2021 (~ to 2.0%), and the various headwinds
faced by the sector, ICRA has also revised the assets under management (AUM) growth rate for
Retail-NBFCs for FY2020 to 10-13% and expects AUM to grow at 6-8% in FY2021.

ICRA takes note of the various initiatives taken by the Government of India (GoI) and the Reserve
Bank of India (RBI) to bolster the segment, including the 3-month moratorium on term loans and
working capital borrowings, which can, in turn, be passed on to their borrowers. Most entities carry
liquidity for 1-2 months for debt servicing and other routine expenses. ICRA believes that the many
entities (especially the small-mid-sized and lower rated entities), considering the uncertainties
regarding the lockdown period and the impact on the economic activity and collections, may opt for
the moratorium. Also, the moratorium is not applicable for market instruments like non-convertible
debentures (NCDs), etc, which account for a higher share of higher rated entities. ICRA believes that
the entities will extend need-based moratorium to their borrowers, which can support their inflows
and liquidity to a certain extent.

The RBI has also taken steps to infuse liquidity into the system via targeted long-term repo operations
(TLTROs) of Rs. 1 trillion, a 100-bps cut in the cash reserve ratio (CRR) of banks (available for one year)
and an increase in the marginal standing facility (MSF) by 1% (available till June 2020). These
measures could increase the available liquidity by about Rs. 3.7 trillion. The system was already
carrying surplus liquidity of about Rs. 3.0 trillion. Therefore, a sharp increase in system liquidity could
ultimately find its way into the non-bank1 sector. However, in view of the heightened credit risk and
the existing high exposure (~8-9% of the bank credit) of the banking system, the extent of the same
remains to be seen. The widening of the risk premium since March 2020 with the same continuing
even after the announcement of the sizeable liquidity boosting measure point towards continued risk
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1 Non-banks - NBFCs and housing finance companies (HFCs)

 aversion to the NBFC sector and accordingly, most of the incremental exposures, which would be taken by the banks, are expected to be towards the higher rated and retail
focussed entities and entities with strong parentage.

The borrower segment for Retail-NBFCs is largely self-employed and dependent on the cash economy. Thus, this segment is extremely vulnerable when the overall economic
activity is completely locked down. The 3-month moratorium, would lead to some postponement of the pain that would ultimately impact the segment. ICRA expects the sectoral
credit cost and delinquencies to increase by about 50-100% (depending on the asset class) over the next few quarters and the same could increase further if the impact of
COVID-19 on business activities persists for a longer-than-expected period. Considering the expected impact on the income levels of these borrowers during the lockdown period,
the revival trajectory and income stabilisation would be fairly long-drawn. Lenders would also take cognisance of the same while taking any incremental credit exposure to the
segment. ICRA notes that loan sell-downs [securitisation/direct assignments (DAs)], which supported the segment post the liquidity tightening in September 2019, would also
slow down in view of the heightened credit risk. ICRA expects minimal loan sell-down transaction in Q1 FY2021, with some revival in demand from H2 FY2021, depending on the
segmental asset quality. In view of the above, the loan sell-downs in FY2021 are expected to be lower by at least 15-25% of the volumes seen in FY2020.

The Retail-NBFC AUM stood at Rs. 9.8 trillion in December 31, 2019, growing 15% YoY. Demand slowdown in the vehicle segment, which contributed almost 50% to the Retail-
NBFC AUM, and weaker offtake in the SME segment (21% of AUM) were the major reasons for the slower growth. The QoQ AUM growth was modest for most of the key segments,
barring personal credit, gold loans and microfinance. The microfinance growth came off its peak as the entities faced asset quality and business concerns in certain geographies
while the personal credit growth remained healthy and higher than most of the other asset classes. The gold loan growth was robust, supported by the increase in gold prices
and access to adequate liquidity, considering the short-term nature of the assets.

The segmental asset quality continued to weaken as the 90+ days past due (dpd) increased by about 30 bps over March 2019. Commercial vehicle (CV) and LAP+SME were the
major reasons for the increase in the delinquencies while other asset classes remained largely range-bound. However, based on the current scheme of things, the overall asset
quality of all the segments is expected to witness headwinds over the next few quarters, resulting in a ~50-100% increase in the delinquencies / credit costs.

The net profitability of Retail-NBFCs is also expected to fall by about 70-120 bps over the next few quarters from the current levels of 2.7-2.8% as asset quality pressures
compounded by slower growth (leading to weaker operating efficiencies) would weigh on their earnings profile.
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