The second covid wave is expected to significantly affect May 2021 loan pool collections as borrowers continue to face stretched liquidity and lenders see collection disruptions, rating agency India Ratings said on Tuesday. The agency believes the second wave and its demand disruption will continue to impact borrowers at the bottom of the pyramid and loan sale transactions could see higher delinquencies from rural geographies.
The agency said it has already witnessed a drop in April 2021 collections in the rated securitisation transactions across asset classes. Across all rated transactions, the current collections reduced to 73% in April 2021 from 84% in March 2021.
“Even as non-banks ramped up digital infrastructure, collections could be impacted significantly in May 2021 primarily because lenders were forced to stop door-to-door collections after agents, staff and borrowers had fallen ill,” the rating agency noted. “In a situation where the safety of the employees is paramount, lenders are cautious regarding their staff stepping out for collections and follow-ups.”
The agency also expects an additional layer of delinquency build-up in the securitisation pools over and above the delinquency currently witnessed. Vulnerable borrowers (both individuals and businesses) would have already slipped into delinquency during the first shock in FY21 and incremental delinquencies in FY22 are expected from non-urban geographies and borrowers with fragile financial cushions.
Disruptions in face-to-face collections have also significantly impacted microfinance loan performance. A number of microfinance borrowers who were paying only one month’s due in January to March, have been significantly impacted leading to much lower current collections in that segment.
Though, the rating agency believes that the subsequent pandemic waves could be smaller than from the first as economic agents learn to ‘operate within a pandemic’. Although the nature of the shock in the second wave is different from the first one, India Ratings believes the impact of capital obsolescence that started off in FY21, due to structural changes in consumption patterns and investment priorities, will continue in FY22.
“Thus while most businesses recovered, there are pockets of stress in each asset class, as characterised by the nature of business, such as contact-intensive discretionary services which may not recover until sizeable population is vaccinated,” the agency noted. “The comeback of demand levels in FY22 post the second wave may not be to the levels witnessed in FY21, due to the lower consumer sentiment as a fall out of the widespread health crisis.”
The second wave is more dispersed and thus smaller towns and villages witnessed a sharp rise in infections and fatality. This is likely to affect the rural non-agri demand sentiment and rural employment levels in addition denting urban demand. With reduced income levels and higher health expenditures, India Ratings expects the performance of asset segments such as microfinance to be significantly affected.
“Asset segments dependent on agriculture such as tractor/farm equipment loans are expected to be affected to a lower extent as they cater to the non-discretionary demand,” it said. “The pandemic shocks continue to adversely impact the low-middle-income individuals and small businesses, whose loans are typically securitised in India. The pandemic has also accelerated the formalisation of the economy where bigger/organised businesses are gaining market share from smaller businesses.”