Understandably, each asset class will behave differently based on the underlying borrower profile, linkage to economic activity and local restrictions. For instance, in home loans, the largest NBFC segment, asset quality is expected to be relatively better than in the other segments. Salaried customers make up over two-thirds of the home loans portfolio, and self-employed the balance. We expect delinquencies in home loans to rise 30-50 bps for salaried professionals and ~150 bps for self-employed/ affordable housing segments this fiscal.

In vehicle finance, the second large NBFC segment, asset quality will depend on improvement in macroeconomic environment as commercial vehicles constitute bulk of the portfolio. Given the weak economic activity and slow pick-up in freight, collection efficiency has remained well below pre-pandemic levels in vehicle loans. Increase in early delinquencies is expected to be the highest in this asset class.

The MSME and unsecured segments are likely to see the cascading impact of lockdown on the operations of borrowers and lenders, with heightened risks of salary cuts and job losses, and weak economic activity. However, with entities typically adopting aggressive write-off policies, the reported NPAs for unsecured loans may not reflect the true stress in the segment.

As in the past year, the wholesale segment will be in a cleft stick because of the impact on cash flows of borrowers and slowdown in real estate sales. From a recovery perspective, a lot will depend on the timelines and modalities of lifting of lockdowns and return to normalcy in operations of NBFCs.

The restructuring scheme for MSME borrowers and personal loans announced by the RBI may now limit the rise in NPAs in these segments. Nevertheless, NBFCs are expected to be prudent in offering restructuring selectively to deserving accounts and not in a blanket manner.

Says Ajit Velonie, Director, Crisil Ratings, “As opposed to reported GNPA, collection efficiency will be a better yardstick to measure asset quality challenges now. Given the trend till August 2020 and the lingering uncertainties, it is imperative that NBFCs create capital buffers for asset-side risks. The good part is we have seen many of them raising capital of late. Those with weak capital buffers may see their credit profiles getting affected.”

How NBFCs restructure their loans, and the consequent impact on their cash flows will bear watching. Crisil will continue to focus on three areas in the road ahead and take appropriate rating action:

• Collection efficiency after the moratorium, since it will be a lead-indicator of potential ultimate credit losses
  
• Equity-raising plans to mitigate the impact of loan-loss provisions on capitalisation, if any
  
• Adequacy of liquidity to cover upcoming debt obligations and operating expenditure
  

Note on collection efficiency: Collection efficiencies have been calculated as the proportion of actual collections (from billings for the month and overdues but excluding prepayments) during the month to scheduled collections/ billings for the month (this takes into account the dues from the book assuming there was no moratorium).

^[1] NBFCs including housing finance companies, but excluding government-owned NBFCs
^[2] Micro, small and medium enterprises: includes Loans against property (LAP) and unsecured SME loans