India Ratings and Research (Ind-Ra) witnessed a drop in April 2021 collections (May 2021 pay-outs) in the rated securitisation transactions across asset classes. As per early signals, the second covid wave is expected to significantly affect May 2021 loan pool collections (June 2021 payouts) due to borrowers’ stretched liquidity and lenders’ collection disruptions. The agency believes the second wave and its demand disruption will continue to impact borrowers at the bottom of the pyramid and transactions will witness moderately more delinquencies from rural geographies in FY22 than in FY21. Although delinquencies are expected to build up, majority of the lenders are restructuring stressed loans minimally.
pandemic’s impact on businesses and thereby on loan performance is
characterised by transient liquidity stress and structural delinquency
build-up. The agency in May 2021 assessed the liquidity impact of the
second wave on the rated transactions. The agency will monitor the
deterioration, if any, in loan pool delinquencies by end-2QFY22. Although most
of the rated transactions have aged and credit enhancements (CE) have built-up
adequately, Ind-Ra will continue evaluating if the available enhancements are
adequate for the rating level stresses, given that some of the transactions
have again started dipping into transaction cash collaterals. Along the way,
the agency will recalibrate the base case default rate and recovery rates by
reassessing the delinquency build-up in the originator’s portfolio and in rated
Dispersed Second Wave to Impact Rural Collections: The resurgence of the pandemic in April-May 2021 and the consequent containment measures affected collections in securitisation transactions across asset segments and across geographies. The impact in transaction collections (Figure 1, current collections against current demand, averaged across 160 transactions) in April 2021 was limited as the restrictions came into play in the second half of the month. Across all Ind-Ra rated transactions, the current collections reduced to 73% in April 2021 from 84% in March 2021.
Containment restrictions (in a staggered manner across most of the country) and consumer sentiments affected businesses in April-May 2021. Even as non-banks ramped up digital infrastructure, collections could be impacted significantly in May 2021 (June 2021 payouts) primarily because lenders were forced to stop door-to-door collections after agents, staff and borrowers had fallen ill. In a situation where the safety of the employees is paramount, lenders are cautious regarding their staff stepping out for collections and follow-ups. Disruptions in face-to-face collections significantly affect microfinance loan performance. A number of microfinance borrowers were paying one month’s due in January to March, but since they were already in overdue and collection allocation is first made to overdue rather than current dues, the current collections are lower.
Muted Medium-term Sentiment: The economic
impact from 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 (Figure 2) from the first one, Ind-Ra
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. The economic agents adjusted expenditures and savings in FY21
to align with the new normal. These adjustments added to the pent-up demand in 2HFY21
and resulted in a differentiated business recovery. 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 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. Also, the consumption adjustments / investments to align with the new
normal have already been executed by economic agents in FY21.
second wave is more dispersed and thus smaller towns and villages witnessed a
sharp rise in infections and fatality. This could affect the rural non-agri demand
sentiment and rural employment levels in addition denting urban demand. With
reduced income levels and higher health expenditures, Ind-Ra 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. 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.