NBFCs' Refinancing Likely To Increase, Says Report

NBFCs' Refinancing Likely To Increase, Says Report
PTI - 12 August 2020

Mumbai, Aug 12: Non-Banking Finance Companies (NBFCs) are likely to see an increase in their refinancing requirements as the Reserve Bank has allowed restructuring of loans that are facing stress due to the COVID-19 pandemic, says a report.

"The Reserve Bank of India's decision allowing lenders to restructure loans would increase their refinancing requirements, especially for 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. However, 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 the 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 an easing of lockdown restrictions.

However, regional lockdowns did impact collections during July 2020.

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.

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 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 current mayhem.