Asset Quality Risks is Still Haunting NBFCs & Banks: ICRA

Asset quality risks for banks and NBFCs remain elevated despite the recent decline in loans under a moratorium, rating agency ICRA said.

Accordingly, most of the banks, as well as NBFCs, have reported a decline in the loans under the phase 2 (June-August 2020) of the moratorium as compared to phase 1 (March-May 2020).

"This is due to the fact that the last 10-15 percentile of the borrowers who continue to opt for the moratorium will be more vulnerable to slippages," ICRA said in a statement.

"Although the gradual relaxations in restrictions imposed during the lockdown have helped in improving the collection efficiencies and thereby reduction in residual assets under a moratorium, the pace of recovery seems lower than expected because of localised re-imposition of lockdowns by various states over the last two months."

The rating agency has already cut the GDP forecast for the current fiscal to (-) 9.5 per cent contraction vis-a-vis an earlier estimate of a (-) 5 per cent contraction.

As per ICRA estimates, the median loans under moratorium would be around 25-30 per cent compared to a broad band of 10-50 per cent of total loan books with many of the borrowers being common under Phase 1 and 2.

"In general, the moratorium levels across banks are lower than those of NBFCs with private banks having even relatively lower levels," the statement said.

"Early trends for July 2020 indicate a nominal improvement in collections over June 2020 levels but remain considerably lower than the pre-Covid levels of around 90-95 per cent for most asset classes."

According to ICRA, given the commonality of borrowers under both phases, the asset quality risks are likely to continue to remain high for the lenders.

"However, unlike the previous asset quality cycle, where the stressed assets build-up was driven largely by corporate segment, this time, the stress is relatively higher for borrowers in micro small and medium enterprises (MSMEs), agriculture and retail (especially self-employed) segments," ICRA said.

"Therefore, the debate is now on the need for a further extension in moratorium or a one-time restructuring for the borrowers who continue to face challenges and remain under moratorium by end of August 2020."

Besides, ICRA said that while loan restructuring could postpone the recognition of stress in the lender book in the near-term, high share of such assets would be a credit negative.

"Also, the efficacy of this restructuring would be crucial as lenders would be faced with many requests coming from the smaller ticket size borrowers (in the retail and MSME space) vis-a-vis the large borrower restructuring done by them in the past," the statement said.

Furthermore, ICRA said as the one-time restructuring window is made available, more borrowers may opt for it to ease out the near-term uncertainties, conserve liquidity and to smoothen their cash flow as the economy takes a turn for revival.

"If the RBI were to consider one-time restructuring, it is expected to be extended to certain sectors which would take longer to recover," the statement said.