Across 154 rated securitisation transactions, India Ratings and Research (Ind-Ra) saw a decrease in average current collection effectiveness to 69.2 percent in May 2021 from 82.8 percent in March 2021.
Improving economic optimism, as well as a fiscal and financial stimulus, are projected to boost loan performance in the medium term. Credit-fueled consumption demand is likely to rebound closer to 2HFY22 as business and consumer confidence continue to improve and stabilise. Uncollateralized asset classes, such as microfinance and unsecured personal/business loans, continue to underperform, as seen by collection shortfalls and arrears accumulation in these sectors. Increased consumer borrowing, along with declining real income and rising household costs, is projected to put a strain on lenders' retail portfolios. As a result, the regulator's suggestion that microfinance lenders focus on the household's overall repayment capabilities across all debts is a step in the right direction. While the agency anticipates large delinquent loans in softer buckets to begin performing as limitations are gradually lifted, default accumulation in deeper buckets is anticipated to remain poor owing to a pandemic setback among families and small enterprises. 24 Ind-Ra rated securitisation transactions are now on Rating Watch Negative owing to poor collection performance and counterparty concerns. Furthermore, the agency has been closely analysing maturity risks in transactions with a timely-interest-ultimate-principal payment structure and short residual tenors, as well as in deals that heavily rely on external credit improvements. The possibility of another wave of COVID-19 infections and their effects on the performance of these transactions remains a key risk in the near term, as the vaccination drive may take several months to gain traction across the country.
The Reserve Bank of India's proposed harmonisation rules, which would apply to all regulated businesses, place a greater emphasis on the household repayment capacity and borrower safety via increased openness. The suggested income assessment at the household level intends to limit household debt and level the playing field for all types of originators. In Ind-originator Ra's and servicer review for microfinance lenders, the assessment methodology (particularly when significant economic activity in the segment is through cash transactions) to arrive at household income levels, as well as the possible variation of estimates among originators, become critical.
If assistance measures are executed successfully, the recent stimulus announced by the regulator and the government may relieve borrowers' troubles to a substantial amount. Because the window for debt restructuring is open until September 2021, borrowers and banks may use it to reach win-win solutions based on the former's cash flows. Bank guarantees for loans to new or current microfinance lenders for on-lending to small borrowers of up to INR 125,000 will deliver liquidity to families at the bottom of the pyramid.
The inclusion of an INR 1.5 trillion Emergency Credit Line Guarantee Scheme for small and medium-sized firms, as well as the extension of the debt restructuring scheme to micro, small, and medium-sized organisations, are anticipated to enhance credit flows to small businesses.
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