Mutual Funds Commodities Research Tax Planning IPO Our Team Contact Us    
Google
Web www.equitybulls.com
Interesting Articles

| More

NBFCs asset quality and profitability at serious risk: Acuité Ratings & Research Limited

Posted On: 2020-04-07 16:09:44


Covid-19 intensifies headwinds for NBFCs


Liquidity and ability to service debt are short term challenges; Asset quality and profitability at serious risk in the longer run

While the liquidity position of the NBFCs with a good track record and a solid business franchise were starting to return to comfortable levels in H2FY20, Covid-19 has triggered a fresh set of challenges. Acuité Ratings has undertaken a comprehensive analysis of 11 large retail NBFCs to understand the impact of Covid-19 on the immediate liquidity as well as on asset quality and profitability outlook for the sector in FY21. These 11 entities account for 43% of the advances of the retail NBFC sector.

Since RBI has provided a 3 month moratorium framework (March - May, 2020) for banks and NBFCs, almost all NBFCs are expected to provide and also avail such a moratorium, which is likely to provide only a temporary reprieve. We believe that the impact of Covid-19 on the overall NBFC sector will not only be limited to a tough liquidity position and weaker ability to manage debt servicing in the short term but there will also be a longer term impact of the shutdown on their asset quality, business and profitability levels.

In our opinion, the immediate implication for the retail NBFCs is the lack of clarity on their debt servicing ability in the near term i.e. Q1FY21. With collections coming to a standstill, the primary cash flows of the NBFCs have been completely disrupted. While we can presume that most banks will provide back to back loan moratorium, there is no indication that it will be applicable for debt market instruments. Acuité's analysis of the top 11 retail NBFCs in India highlights that almost 60% of their borrowings (excluding securitisation) are from non-bank sources and require continuity in debt servicing. With minimal collections, the NBFCs can only depend on their cash reserves and any backup credit lines from banks, if available for servicing such debt. Says Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research "The aggregated debt repayment including interest for the top 11 retail NBFCs in the current quarter i.e. Q1FY21 is estimated to be between Rs. 40,000 Cr - Rs. 60,000 Cr while the cash reserves are estimated to be around Rs. 45,000 Cr. It is apparent that many of these NBFCs would find it difficult to manage their cash flows including their operating expenses during the next 3 months unless they get access to additional bank lines or refinance. We estimate the refinancing requirement for these NBFCs at around Rs. 10,000-20,000 Cr to avoid any challenges in their debt servicing and to sustain their operations."

Beyond the immediate liquidity challenges, the key risk for these NBFCs is a sharp deterioration in the delinquency levels subsequent to the expiry of the 3 month moratorium. Acuité has worked out a profitability (RoAA) vulnerability matrix for the retail NBFC sector depending on the leverage levels and the expected delinquency (or Stage 3) levels. Says Vinayak Nayak, Head - Financial Sector Ratings, Acuité Ratings "Our vulnerability analysis indicates that NBFCs with leverage of 3x or more have a significant likelihood of incurring losses in FY21 if the stage 3 delinquencies or NPAs increase over 8%; in particular, those NBFCs with capital adequacy levels of 20% and lower are likely to be more impacted as the buffer to absorb any losses will be lower vis--vis regulatory threshold. Even if the deterioration in asset quality is not that sharp and it increases only up to the band 5%-8%, the impact on the profitability will be very significant given the low business volumes particularly in the first half of FY21 and the high operating costs of the larger players." Further, the utilisation of the cash collateral (CC) is a significant possibility in securitised pools over the next 6 months and can have an additional impact on the NBFCs' profitability. Acuité's analysis expects the disruption from complete or partial lockdown to subside completely by Q2 FY2021, which if prolonged, can have a more severe impact and raise concerns on the sustainability of a few players.


Source: Equity Bulls

Click here to send ur comments or to feedback@equitybulls.com





Other Headlines:

JM Financial Yield Enhancer (Distressed Opportunity) Fund I raises Rs.160 crore in its first close

Samco Securities launches BTPT - Buy Today, Pay In Two days for Investors Buying Stocks

No data breach of BHIM app: Report

India's sovereign rating downgrade by Moody's - Acuité Ratings & Research

Banking Sector Credit Trends - Unusual trends - HDFC Securities

Rollover Report for May - June 2020: Angel Broking

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research on Q4 GDP

Mr. Dhiraj Relli views on GDP Numbers - HDFC Securities

Banking Sector Update - NIM compression on the cards - HDFC Securities

May series ends with a bang: Angel Broking

May 2020 F&O Series Expiry - Mr. Nandish Shah, Technical Research Analyst, HDFC Securities

Views on Impact of Locusts Attack on Agriculture - Acuité Ratings & Research

ICAI establishes Center for Audit Quality

Bharti Telecom raised over Rs. 8433 crores through Accelerated Book-build offering of equity shares of Bharti Airtel

SATYA MicroCapital raises INR 105 crore equity funding from Japan-based Gojo & Company Inc.

Mr. Rajnish Kumar, Chairman, SBI & IBA on the announcements made by RBI today

Views of Mr. Umesh Revankar, MD and CEO, Shriram Transport Finance on RBI announcement

Views of Mr. George Alexander Muthoot, MD, Muthoot Finance on RBI announcement today

Views of Ms. Anagha Deodhar - Economist, ICICI Securities on the RBI announcement today

Views on RBI Policy announcement today - Federal Bank

RBI Monetary Policy (May 2020) by Shanti Ekambaram, Group President - Consumer Banking, Kotak Mahindra Bank

Religare Finvest Ltd. on today's monetary policy by RBI

RBI monetary policy announcement - Mr. Jyoti Roy, DVP Equity Strategist, Angel Broking Ltd

RBI's proactive measure will help revive economy: Dr.Niranjan Hiranandani

Mr. Dhiraj Relli views on today's announcement made by RBI

Views of Mr. R K Gurumurthy, Head - Treasury, Lakshmi Vilas Bank on the RBI announcement today

Suvodeep Rakshit, Vice President & Sr. Economist, Kotak Institutional Equities on RBI announcement

Suman Chowdhury, Chief Analytical Officer at Acuité Ratings & Research, on today's RBI announcement

General Insurance Sector Update - GDPI continues to decline due to Lockdown - HDFC Securities

Stress in Banking Sector to Continue: Geojit Financial Services

Banking Sector Update - What have banks said - HDFC Securities

Satyam Shivam Sundaram, EY India on measures announced by Finance Minister today

HDFC Securities: Mr. Dhiraj Relli views on Fourth Set of Economic Measures announced by Finance Minister

Structural intervention to spur investments - Ramesh Nair, CEO and Country Head (India) JLL

MNCs & their unlisted subsidiaries - A case of misplaced premium & forgotten risk

India Equity Strategy - FM's package: Addressing liquidity concerns - HDFC Securities

Mr. Umesh Revankar, MD and CEO, Shriram Transport Finance on package announced by FM

Mr. Rajnish Kumar, Chairman, SBI on FM's announcement

Central Government's Atmanirbhar Bharat Initiative - Tata Projects Ltd

FM Stimulus View: Mr. Shachindra Nath, Executive Chairman at Ugro Capital

Views on Finance Minister's Announcement - Acuité Ratings & Research Limited

Fiscal interventions set to do the heavy lifting

Views of Mr. R.K.Gurumurthy, Head - Treasury, Lakshmi Vilas Bank on the FM announcement today

Finance Ministry's announcement - Mr. Jyoti Roy, DVP Equity Strategist, Angel Broking Ltd

Mr. Dhiraj Relli views on Economic Package announced by Finance Minister - HDFC Securities

PM's announcement to impact stock market - Angel Broking

Views on Financial Relief Package announced - Acuité Ratings & Research Limited

View on IIP and CPI data - Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research on the March IIP and April CPI

Prime Minister's Economic Package - Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services







Website Created & Maintained by : Chennai Scripts
West Mambalam, Chennai - 600 033,
Tamil Nadu, India

disclaimer copyright © 2005 - 2019