Declining Covid infection rates after May 2021 and thereby easing of movement restrictions/lockdowns in western and northern regions of the country paved the way for elevated collection activities of the lenders which augmented the average collection efficiency in ICRA-rated securitised retail pools originated by NBFCs and HFCs for June 2021.
Collections are expected to further improve in subsequent months as long as there is no fresh surge in Covid cases. ICRA observes that the collections in retail pools securitised post the first wave (i.e. September 2020), especially for the more affected unsecured lending sector, have fared better than the pools originated prior to the same.
This is on account of tightening of the prevailing credit appraisal processes and parameters by the lenders to ensure the addition of better-quality loans in the portfolio coupled with stringent loan selection criteria espoused by the investors such as high bureau scores, non-moratorium cases, least infected states/districts etc.
Dwelling further, Mr. Abhishek Dafria, Vice President and Head – Structured Finance Ratings, ICRA, says, “With the gradual ease in restrictions from June 2021 across many states, the monthly collection efficiencies increased by 7-10% over the previous month across the asset classes as observed in ICRA-rated securitised pools. Based on our discussions with originators, the collections in July have continued to maintain an upward trajectory. Nonetheless, any surge in Covid infections or onset of third wave would derail the recovery in collections. So far we are seeing localised events unfold such as opening up of Maharashtra whereas newer restrictions being imposed in Kerala will affect entities concentrated in those regions and not the entire industry.”
Despite the absence of relief measures, such as the moratorium provided in the previous year, the impact of second wave on the overall economic and business activity was not severe due to the structured and less stringent approach adopted by the state governments while imposing movement restrictions/lockdown. However, the rural and semi-urban areas of the country were affected more by the second wave compared with first wave. This affected the repayment capability as the income generating ability of the borrowers was impacted across urban, rural and semi-urban areas. Resultantly, the recovery in collections of the weaker profile borrowers in microfinance loans has remained lower. A similar lower collection recovery trend is evident in unsecured SME loans because the broader economic and business activities are yet to achieve normalcy levels. Such borrowers’ repayment ability (i.e. microfinance and unsecured SME loans) was impacted by the unforeseen higher medical expenses amid lower business cash flows. Nonetheless, collections in the Housing loans (HL) witnessed swiftest recovery in June 2021 since they were least impacted as seen during last fiscal year. Further, the collections in commercial vehicle (CV) loans have also seen considerable improvement. This was on account of ease in movement restrictions in June 2021 enabling higher inter/intra-state movements backed by increased consumer demand in e-commerce segment and revival of business/mining/factory production activities driving movement of raw materials/final products. Further, the minimal presence of highly affected passenger vehicle (i.e. buses) loans in ICRA-rated vehicle loan pools has led to healthy performance in vehicle loan pools.
Adds Mr. Mukund Upadhyay, Assistant Vice President and Sector Head – Structured Finance Ratings, “The 90+ delinquencies have declined in June 2021 compared to May 2021 across asset classes as majority of the lenders have reported lower bounce rates in their portfolio led by the improvement in collections. Basis the stable collections and lower bounce rates being reported by several originators in their portfolio for July 2021 month, we believe that the asset quality will improve further in Q2 FY2022 as entities would continue to focus and strengthen their collection efforts at a greater intensity to reduce the slippages given the uncertainty prevailing regarding the third wave amid moderate pace of vaccination drive. For ICRA-rated securitisation transactions, we are maintaining a ‘Stable’ outlook and would be monitoring the collection efficiency, delinquencies trends and credit enhancement cover closely.”