Moratoria lapse: NPAs in wholesale loan book of non-banks to rise, says Crisil

As funding remained an issue, disbursements too were sluggish in H1FY20 and prospects for the current year are subdued.

As demand for real estate remains weak, the sector is experiencing significant headwinds, impacting the financial flexibility of many operating companies. With stress building in the sector, wholesale loan books of non-banks — comprising NBFCs and HFCs — de-grew further by 3-5% in H1FY20 following a de-growth of 2% in H2FY19, said Crisil Ratings in a report. This comes on the back of a 32% compound annual growth rate (CAGR) between FY16 and FY18, and an 11% growth in H1FY19.

As funding remained an issue, disbursements too were sluggish in H1FY20 and prospects for the current year are subdued. The de-growth is largely on account of funding challenges since September 2018 due to confidence deficit amid concerns over asset quality in the wholesale loan books (including real estate financing, structured credit and promoter financing).

Crisil expects wholesale loan books of non-banks to rise as a major chunk of their loan books focused on wholesale financing is under moratorium. Krishnan Sitaraman, senior director, Crisil, said, “The principal moratorium is estimated at 50-70% of assets for some non-banks, going as high as 90% in some cases. As the moratoria lapse, slippages will manifest. Consequently, non-performing assets are expected to rise in the near-to-medium term in the wholesale portfolios, as an increasing proportion of the loan book comes out of moratorium.”

Lenders have been selective on funding. Even though many non-banks have reduced their shorter-tenure borrowings and increased on-balance sheet liquidity, interest from institutional investors in the debt capital market has remained tepid. A significant reversal in this trend is unlikely in the near term even as bank funding has not yet fully bridged the gap. Non-banks with strong parentage and those who are retail-focused with strong credit profile and sound liquidity have managed to access funds and have reported growth, while others haven’t.

Standalone NBFCs focused only on wholesale lending face relatively higher confidence deficit because of lingering concerns about asset quality. An analysis of commercial paper (CP) issuances — a good barometer of market confidence — by non-banks validates this trend. Issuance of CPs by non-banks with strong parentage in recent months has bounced back close to the peak average of June-August 2018. However, CP issuances by non-banks without strong parentage —especially wholesale-oriented NBFCs and HFCs — have wilted, plunging as much as 90% in certain cases.

To be sure, a part of this reduction can be attributed to non-banks consciously going slow on CP issuances to improve their asset liability maturity (ALM) profiles. Ajit Velonie, director, Crisil, said, “Even as the ALM profile has improved for many non-banks, funding access challenges continue as market concerns have shifted towards asset-quality metrics. Apprehensions over the asset quality of wholesale-oriented standalone non-banks are not unwarranted. A significant portion of the exits for non-banks in the past was through refinancing. The current economic environment poses challenges in this regard, although some good quality assets will still draw interest from investors.”