NBFCs survived first Covid wave but face second hurdle, says RBI

Non-banking finance companies (NBFCs) have managed to survive the first wave Covid inflicted slow down but given the persistence of infections, the full effects of the lockdown and suspension of business on their asset quality will only be known gradually, Reserve Bank of India (RBI) said in its monthly bulletin.

Among sectors NBFCs lend to, industrial sector, particularly micro and small and large industries, were the hardest hit by the pandemic as they posted decline in credit growth.

However, NBFCs in the retail loan sector stayed ahead of the curve aided by their relatively low delinquency.

Incremental credit flows to the retail sector continued to grow in the second and third quarter of fiscal 2021 led by vehicle loans, gold loans, transport and tourism.

“Players in the retail segment stayed above the curve by gauging the public sentiments and playing to their strengths. With the persistence of the pandemic and the need for observing social distancing norms, passenger vehicles sales increased by 13.6 per cent in December 20207. It is mirrored in the disbursal of vehicle loans by NBFCs, as these loans grew by 10.7 per cent in Q3:2020-21. Loans against gold also grew robustly as it filled in the cash requirements and possible working capital requirements of small firms. However, incremental credit to industries declined in the same period as the sector is yet to shake off the impact of the pandemic,” RBI said.

NBFC profitability had dropped in the first quarter of fiscal 2021 due to the Covid induced lockdown, however, the situation improved marginally in the second quarter. NBFCs return in assets (RoAs) and return on equity (RoE) improved from 1.8% and 10.3% respectively in the second quarter of fiscal 2020 to 2.3% and 12.7% in the second quarter of fiscal 2021.

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Asset quality of NBFCs also witnessed an improvement in 2020-21 due to regulatory forbearance on declaring of NPAs. Both gross as well as net NPA ratios fell in the third quarter if fiscal 2021 compared to the previous year.

RBI however acknowledged that the true extent of NPAs in the sector may be gauged in the upcoming quarters as the interim order by the Supreme Court on asset classification standstill was lifted in March 2021.

Overall though consolidated balance sheet of NBFCs grew at a slower pace in the second and third quarters of fiscal 2021 due to challenges due to Covid and lower demand for loans, NBFCs continued to disburse credit despite the disruptions.

“The retail sector benefitted from incremental credit disbursed by the sector, aided by their low GNPA ratios and by staying tuned to customer preferences. The profitability of the NBFCs improved in Q2:2020-21 compared to the corresponding quarter of the previous year on account of steeper fall in expenditure than in income,” RBI said while admitting that the future of the sector will now depend on how it copes with the second wave of Covid.



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