Collections are on the rise, but loans to MSMEs appear to be an Achilles heel for NBFCs

India’s non-bank lenders are bracing for a surge of defaults from micro, small and medium-sized enterprises (MSMEs), most affected by the pandemic.

Mistrust persists despite improving collections over the past two months. Lenders believe this is a temporary relief.

The efficiency of collection from non-bank lenders has improved even for vulnerable segments such as MSMEs and microfinance. Crisil Ltd analysts estimate collection efficiency to be 65-70% of pre-pandemic levels in August for MSMEs and microfinance. In comparison, collection efficiencies were 25-30% during the containment months of April and May, and around 55-60% in June and July.

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Not quite there

“Businesses in big cities are still affected, but in many areas they are making a comeback. We have seen an improvement in our collections, ”said Rajesh Sharma, Managing Director of Capri Global Capital Ltd, a non-bank lender that primarily caters to small businesses.

Capri Global operates primarily in the western and northern states of India, which are among the places most affected by the pandemic. With nationwide restrictions easing, regional lockdowns have made it difficult for businesses. Sharma thinks that the recovery of the collections so far is encouraging, but that further improvements are difficult.

Edelweiss Securities analysts pointed out that most MSMEs had not yet reached more than 60% of pre-pandemic cash flow levels. “Although the timing of the cost of credit and overall non-performing loans may differ, we maintain that the microfinance and MSME segments remain the most vulnerable to covid-19 disruptions,” they wrote in a note.

Government subsidy programs and Reserve Bank of India (RBI) liquidity measures may have helped so far. Government credit guarantees encouraged banks to lend to MSMEs. However, small businesses need to revive demand and this has been slow so far. Consumer demand is only expected to pick up slowly. The outlook for cash flow is still grim for them. Ergo, lenders would be right to be cautious about lending to MSMEs. Crisil analysts expect non-bank lenders to see a sharp increase in defaults this year largely because of their exposure to small businesses. The proportion of bad debts could increase up to 250 basis points. While restructuring may lower this number, it is uncertain whether non-banks would adopt the method widely. At the same time, other loan segments could perform slightly better. Non-bank lenders can rely on home loans to prevent asset quality from deteriorating sharply. Home loans and even auto loans where borrowers are salaried are expected to withstand the blow of the pandemic. Despite the gloomy outlook for wages and employment, the collection efficiencies of these loans have shown marked improvement.

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