Vulnerable asset quality at IIFL & IndiabullsDespite RBI’s six-month moratorium on loan repayment, which ended in August 2020, loan collections improved at the three NBFCs in the fiscal first half as economic activity resumed as the government progressively lifted lockdowns.
However at Indiabulls, collection efficiency of 96% in October 2020 was slightly lower than 99% prior to the coronavirus outbreak. At IIFL Finance, collection efficiency for business and microfinance loans lags historical averages as lockdowns have significantly weakened earnings and cash flow micro, small and medium-sized enterprises (MSME).
Other NBFCs that focus on commercial vehicle and home loans, and loans against property reported similar improvements in collection efficiency to about 85%-95% in September 2020. Still, collection efficiency at NBFCs is lower than at banks offering similar products.Modest loan growth can help maintain capitalization
According per the report, increased credit costs will hurt profitability at IIFL Finance and Indiabulls as they continue to proactively build provisions to prepare for eventual increases in loan impairments. However, modest loan growth and or loan sales to banks, will help them maintain capitalization.
- Annualized return on assets (ROAs) of IIFL Finance and Indiabulls declined to 1.4% and 1.2% on a consolidated basis from 1.7% and 2.7%,respectively, in the fiscal first half from a year earlier.
- At Indiabulls, revenue from operations after finance costs declined 47% year over year in the six months to September 2020, much more than 14% contraction of its balance sheet during the same period.
- IIFL Finance’s Tier 1 capital ratio as of the end of September 2020 declined to 15% from 18.2% a year earlier. At Indiabulls, which saw slower asset growth, its Tier 1 capital ratio climbed to 24.4% from 22.5% during the same period.
Funding is stable as public sector banks support NBFCs Public sector banks are buying loans from NBFCs to support them and to fulfill their own quotas for lending to priority sectors.
- Despite an anticipated deterioration of asset quality and profitability, funding for IIFL Finance will be stable as public sector banks continue to purchase its loans, easing liquidity stress for the sector.
- However, funding conditions will remain more challenging for lower-rated Indiabulls, and the company will need to continue to shrink its assets to conserve liquidity.
Focus on gold loans will support Muthoot’s credit profileMoody’s believe that while gold loans also are susceptible to a sharp drop in gold prices, it is unlikely to happen. Further, Muthoot’s robust profitability will help it maintain its capitalization and funding at the current strong levels.
In the quarter ended September 2020, loan collections and disbursements at Muthoot exceeded their averages for the past five years. Higher gold prices helped Muthoot’s gross non-performing loan ratio for the gold portfolio decline to 1.3% at the end of September 2020 from 3.4% a year earlier.
The rise in gold prices has enabled individuals to increase borrowings against existing gold collateral, which has become more valuable. As a result, Muthoot’s consolidated gross loans increased 29% year on year in September 2020