Consumer Finance: Asset quality issues may worsen, says Jefferies

By: | Published: March 14, 2017 2:21 AM

As a result, GNPA and credit costs could rise in the next few quarters

At NBFCs collections are relatively better, but it is inadequate to meet past and current dues.

While collection trends are improving, we believe overdue asset pool could continue to rise. Rise in overdue assets have likely been sharper at MFIs vs. NBFCs due to political factors. Part of this could potentially slip into NPA in the next few quarters. We believe GNPA and credit costs could surprise negatively in the next few quarters. We maintain Buy on LIC Housing; Hold on MMFS and SHTF; Underperform on Bajaj and Capital First.

Bharat Financials reported sharp jump in overdue assets in Feb

Recent pre-results update by Bharat Financial indicates that overdue assets>8 weeks have jumped to 4.5% as on Feb 2017 (Q3 GNPA was 0.06%, factoring RBI dispensation). Collection efficiency with a month lag, i.e. for Jan dues in Feb was 92.4%, lower vs. 93.5% collection efficiency for Dec dues in Jan 2016. Despite better collections, overdue pool has increased sharply as collections are inadequate to meet both current and past dues and incremental collections are initially utilised to meet past dues.

Overdue asset to rise despite improving collections

Our feedback indicates that political factors (state, local elections) have contributed to the sharp rise in delinquencies at micro finance institutions (MFIs). At NBFCs collections are relatively better, but it is inadequate to meet past and current dues. Most NBFCs indicated paying multiple installments (to offset past dues) would be difficult for most borrowers especially in segments like 2W/3W, rural, and SME segments. In the farm sector, cash flows are improving. Cash flows from Rabi crop would start by end March. However, farmers would enter the next sowing season after June, when cash outflows increase. Thus, normalisation is unlikely before the next harvesting season. We believe overdue assets in SME, rural, 2W, and used CV segments could continue to rise and partly slip into NPA in next few quarters.

More feedback from NBFCs

Shriram City Union Finance indicated that 2W disbursal has improved from recent lows, though it is still slightly below pre-demonetisation levels and SME and used vehicles have seen higher stress due to demonetisation, but situation is improving and growth is slowly coming back and collections are better.

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Credit costs could surprise on the upside

At Bajaj Finance, 16% of 2W/3W portfolio (8.6% of BAF AUM) was overdue as on Dec 16 (8 qtr average 11.6%). 2W/3W GNPA was 4.5% in Q3. If 20% of BAF’s overdue 2W/3W assets slipped into NPA, credit costs could rise by 8-9bps. At SHTF, if 50% of the assets (Rs 4.5 bn) on which RBI dispensation was applied slips into NPA, GNPA could rise by ~35bps. We estimate provision could rise by Rs 1.6 bn assuming SHTF maintains coverage ratio at 75%. Shift to 120 dpd NPA recognition (from 150 dpd) in Q4 could lift SHTF’s GNPA by 1%. SHTF may drop coverage ratio to 70%. This could release Rs 2.3 bn of provision, which could cushion the impact on credit cost. At MMFS, RBI dispensation was applied on Rs 6.7 bn of overdue assets (1.5% of loan book), which could partly slip into NPA in Q4.

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