Impact of 3rd wave low on NBFCs as bad loans fall, collections rise

“The collection efficiency data point to a recovery in the overall operating environment. The commercial vehicle segment, where collection efficiencies fell 60%-70% in 1QFY22, has recovered and is close to pre-Covid levels,” India Ratings said.

On the microfinance loans front, collection efficiency had declined 20%-25% during the second wave and has significantly recovered since then, it said.

On ground data suggests that the third wave impact may not be disproportionate, given that it is not so much of a health crisis as in the second wave and the bounceback shows resilience of the segments, it said.

As per the rating agency, having learnt from the impact of the first two waves, NBFCs are much better placed to handle the possible impact of the third wave.

While the third wave is more rapidly spreading, the need for hospitalisation and casualty has been lower. Also, the healthcare infrastructure seems to be prepared to cope with the rising numbers. The probability of a severe nationwide lockdown, at the moment, seems low with restrictions being imposed at the regional level.

“In absence of any restrictions, the impact on the cash flow of NBFC borrowers may remain modest. Furthermore, a large proportion of the weaker borrowers of NBFCs would have been filtered out in the first 2 waves,” India Ratings said. NBFCs have witnessed a nationwide lockdown for three weeks during first wave and regional lockdowns during second wave.

According to the rating agency, large NBFCs have strong balance sheet buffers to absorb the impact of possible disruptions. Entities have sufficient liquidity to meet at least three months of debt repayments, as also easy access to capital markets and banks for mobilising funds.

“An increased focus on collections and a reduced disbursement rate have helped NBFCs conserve liquidity,” it said. “They have also protected their balance sheet by making higher provisions on non-performing advances and standard assets to shield the impact of incremental credit cost.”