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Loan recast: NBFCs may see rise in refinancing needs, says report

A higher quantum of restructured assets would clearly reflect higher asset quality challenges for NBFCs and could restrict their ability to mobilise funds from banks and capital markets, India Ratings and Research said in a report

Loan recast: NBFCs may see rise in refinancing needs, says report

Reserve Bank of India

With the Reserve Bank allowing restructuring of loans that are facing stress due to the Covid-19 pandemic, non-banking finance companies are likely to see an increase in their refinancing requirements, says a report.

Last week, RBI gave permission to lenders to go for one-time restructuring of corporate and personal loans facing stress due to the disruptions caused by coronavirus.

"The Reserve Bank of India's decision allowing lenders to restructure loans would increase their refinancing requirements, especially for non-banking banking companies (NBFCs)," India Ratings and Research said in a report.

"This is in view of their large contractual debt repayments, as scheduled cash inflow gets deferred, though the severity of the same would depend upon the proportion of loan portfolio restructured and terms of restructuring (i.e complete moratorium vs partial payments)," it added.

A higher quantum of restructured assets would clearly reflect higher asset quality challenges for NBFCs and can restrict their ability to mobilise funds from banks and capital markets, it said.

At the end of June 2020, a substantial portion of loan book of NBFCs was under moratorium. Housing loans had the least portion of the book under moratorium, while wholesale lenders had the maximum portion of their loans under moratorium, the report said.

Collection efficiency, reflecting the repayment behaviour of customers, has improved since April 2020 with easing of lockdown restrictions.

However, regional lockdowns did impact collections during July 2020. Collection levels across asset classes/segments were far below pre-Covid levels.

Businesses still did not generate cash flows sufficient enough to make their timely debt repayment, the agency said.

"We believe a high proportion of loans to certain segments such as real estate developers, commercial vehicle owners and micro small medium enterprises will be restructured, given the weakness in these sectors," it said.

The report said 70-80 per cent of real estate loans were under moratorium at end-June 2020.

Given builders' cash flows were already weak even prior to the pandemic due to anemic sales velocity and lack of refinancing opportunities, the book is likely to undergo restructuring first, it said.

Commercial vehicle players are facing the brunt of reduced freight availability, higher diesel prices and lower freight charges.

NBFCs can restructure these loans, given the poor cash flow with these borrowers, the agency said.

"However, any extension of the loan tenor could dilute the loan to value (LTV) cover because of the accelerated depreciation of the asset. Lenders may prefer principal moratorium only or rescheduling of cash flows to safeguard LTVs of the exposure," it added.

According to India Ratings, although the restructuring package would help borrowers to manage their debt repayments, it is just a temporary solution to the problem created by the pandemic.

The overall health of NBFCs could improve only with a revival in underlying economy and cash flows of borrowers, it said.

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