Asset quality of the non-banking financial companies (NBFC) sector deteriorated in Q3FY22 with the rollback of regulatory forbearances, even as the companies’ balance sheets grew faster and bottom lines improved, said an article by researchers at the Reserve Bank of India (RBI) published as part of the August 2022 bulletin.
The asset quality of NBFCs, which had worsened due to the second wave of the pandemic, stabilised during Q2FY22. However, an uptick in the gross non-performing asset (GNPA) and net non-performing asset (NNPA) ratios was witnessed in Q3FY22 as NBFCs absorbed the impact of revised income recognition, asset classification and provisioning (IRACP) norms.
“The deterioration in asset quality was possibly also attributable to rolling back of regulatory forbearance provided to individuals and small businesses under the Covid Resolution Framework 2.0 by directing NBFCs to invoke it only for borrowers having stress on account of Covid-19,” the article said. These measures are expected to be beneficial in the long run as NBFCs will focus on developing better collection processes and encouraging credit discipline among their borrowers while bridging the regulatory gap between banks and NBFCs.
The industrial sector accounted for the largest share in NPAs, followed by retail loans, services, and agriculture respectively, for the quarter ending December 2021. Within the industry, the power sector contributed significantly to the total impaired assets of NBFCs, accounting for 30% of overall NBFC NPAs by end-December 2021.
As per the report of the Standing Committee on Energy, NPAs in the power sector are attributable to high-interest costs, escalation in cost due to extraneous reasons like court cases, delayed decisions by lending consortiums and lack of working capital.
The retail sector accounted for 31.3% of NPAs of the NBFC sector at the end of Q3FY22. In the retail sector, the vehicle loans added more impaired assets to the sector relative to their share in credit, as the ability to service vehicle loans was adversely affected by low freight rates and rising fuel costs. In the services sector, commercial real estate accounted for the largest share of NPAs, the article said.
The profitability of the NBFC sector improved in Q3FY22 compared to the corresponding quarter in FY21 as the economy shook off the impact of the second wave with relatively fewer operational disruptions.
NBFC credit showed an incremental growth of 11.1% at the end of December 2021, as compared to 17.7% in December 2020, which was on account of a favourable base effect, the article said. “A modest increase in credit growth of NBFCs was witnessed as of end-December 2021 on account of reduced threat of Covid-19 along with progress in vaccinations which led to higher mobility. The advent of the festive season also helped in this regard,” it added.