NBFC asset quality deteriorated in Q3FY22: RBI article

According to an article by Reserve Bank of India (RBI) researchers published as part of the August 2022 newsletter.

NBFC asset quality, which had deteriorated due to the second wave of the pandemic, stabilized during Q2FY22. However, a slight increase in Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA) ratios was seen in Q3FY22 as NBFCs absorbed the impact of revised standards for revenue recognition, asset classification and provisioning (IRACP).

“The deterioration in asset quality was possibly also attributable to the cancellation of the regulatory forbearance granted to individuals and small businesses under the Covid 2.0 resolution by ordering NBFCs to invoke it only for borrowers stressed because of Covid-19,” the article read. . These measures should be beneficial in the long term, as NBFCs will focus on developing better collection processes and encourage credit discipline among their borrowers while bridging the regulatory gap between banks and NBFCs.

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The industrial sector accounted for the largest share of NPAs, followed by retail lending, services and agriculture, respectively, for the quarter ending December 2021. Within industry, the power sector contributed significantly to total NBFC impaired assets, representing 30% of all NBFC APMs by the end of December 2021.

According to the report of the Standing Committee on Energy, the NPAs in the electricity sector are attributable to high interest costs, cost escalation due to external reasons such as court cases, delays in decisions of loan syndicates and the lack of working capital.

The retail sector accounted for 31.3% of NBFC sector NPAs at the end of Q3FY22. In the retail sector, auto loans added more impaired assets to the sector relative to their share of credit as the ability to service auto loans was affected by low freight rates and rising fuel costs. Within the services sector, commercial real estate accounted for the largest share of NPAs, according to the article.

NBFC segment profitability improved in the third quarter of FY22 compared to the corresponding quarter of FY21, as the economy shed the impact of the second wave with relatively less operational disruption .

NBFC credit showed incremental growth of 11.1% at the end of December 2021, compared to 17.7% in December 2020, which was due to a favorable base effect, according to the article. “A modest increase in NBFC credit growth was observed in late December 2021 due to the reduced threat of Covid-19 as well as advances in vaccinations which led to greater mobility. The advent of the festive season has also helped in this regard,” he added.

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