Shadow banks see stress building up in rural, semi-urban regions
Non-bank financiers operating in India’s rural markets are seeing a spike in delinquencies across loan portfolios, thanks to the devastation from the second wave of the covid-19 pandemic
MUMBAI : Non-bank financiers operating in India’s rural markets are seeing a spike in delinquencies across loan portfolios, thanks to the devastation from the second wave of the covid-19 pandemic.
Mahindra and Mahindra Financial Services Ltd, one of India’s top rural-focused non-bank lenders, said the second wave had a significant impact as customers struggled with liquidity challenges despite a bumper harvest.
The lockdowns made it impossible for them to sell their entire produce, affecting cash flows and collections in April and May, the lender said in its fiscal first-quarter earnings announcement.
The company’s gross non-performing assets (NPAs) during this period surged by 650 basis points (bps) on a sequential basis to 15.5% on 30 June.
“The dealerships were not open. The mandis were shut. The banks operated for limited hours and (there was) absolutely no movement on the street. So all of this is what got rural to be in a very confused state of affairs," said Ramesh Iyer, chief executive, Mahindra and Mahindra Financial Services.
The lender posted an unprecedented loss of ₹1,529 crore in the three months to June as provisions for soured loans rose.
Top executives told analysts that while rural India was the worst affected due to covid-19, sentiments are returning to normalcy now.
The lender hopes to script a turnaround during the festive season this year.
Iyer said that rural India went through one of its worst times ever in terms of the covid-19 hit. “And out of the 90 days that was available for operations between April and June, it was hardly around 20 days where there could be any activity, and even those 20 days were kind of hit by part-time operations and the full day not being available to operate," he added.
At diversified non-bank lender L&T Finance Holdings, disbursements and collections in the rural finance business declined sequentially.
The lockdown restrictions also led to an increase in bad loans to 4.4% as of 30 June, up 44 basis points on a quarter-on-quarter basis.
Interestingly, there is something that both non-banking financial companies (NBFCs) and banks have witnessed during the second wave.
Faced with uncertainty, a segment of customers did not repay on time despite having adequate liquidity, choosing to retain the funds instead.
Experts also believe that the stress among non-bank financiers was elevated in the June quarter.
According to Fitch Ratings, the second coronavirus wave will continue to exert near-term pressure on India’s non-bank lenders despite less stringent activity restrictions than in 2020.
“We expect non-banking financial companies ’ upcoming earnings reports to highlight asset quality weakness and profitability pressure as the impact of recent economic shutdowns becomes clearer," it said on 19 July.
The rating agency said that large non-banking financial companies continue to get sufficient domestic funds; however, prolonged stress could strain their funding access.
Smaller and regionally focused non-banking financial companies, Fitch said, will find liquidity more challenging. But refinancing facilities and government guarantees for loans to these lenders and microfinance institutions could mitigate the impact, Fitch added.
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