The COVID pandemic has caused widespread financial devastation and the nation-wide lockdown over the last three months has further dampened the economic health of the country.
Authored by Ondrej Kubik
The COVID pandemic has caused widespread financial devastation and the nation-wide lockdown over the last three months has further dampened the economic health of the country. Its ripple effects have reached all strata and all institutions of the society.
While almost all the sectors are dealing with daily challenges posed by the virus’s outbreak, the Fintech sector and especially Non-banking financial companies (NBFCs) in it are fighting a tough battle to keep the economy from plummeting.
Focusing first on the borrowers of NBFCs, it is no surprise that people are facing disruptions in cash flow. All economic activities in the country have been crippled, unsettling income cycles.
Various households’ income stream has been suddenly interrupted, but necessary obligations like utility bills, monthly ration, school bills and medical expenses have not stopped. Moreover, even if there is relief on the health recovery post the pandemic, people’s cash flow disruptions won’t go away in a blink.
The economy which is currently in survival mode might take a while before jumping on to the path of growth. This uncertainty will impact repayments of the borrowers as there will be, at least short-term, liquidity crunch and all accumulated obligations including EMIs will make matters even tougher leading to greater risks of non-payments and defaults.
To ease the impending financial crisis, the Finance Ministry and RBI have done a wonderful job in extending numerous schemes and sops. For instance, RBI’s move of reducing the repo rate by 40 bps, easing non-performing asset (NPA) classification norms for borrowers.
Moratorium extension on loan repayments to six months is also a step towards reducing the current financial shortfall at the hand of borrowers. It is a welcome move to render immediate relief, but may not be enough to make the problem go away.
At present, borrowers are struggling with their cash flows due to disruption in their business cycles and will need time to restart and gradually come back to a 100 percent level of operations. In addition, they need working capital support to get back to normalcy post lockdown.
Another aspect to consider is that while the measure has been taken, how to do these reach into the hands of the end beneficiary. This is where NBFCs can play a critical role. Today, NBFCs are more regulated and have systems and processes in place to scale up and serve a large base of consumers.
Many NBFCs have very few entry barriers, so even people with no credit history can avail loan benefits. In line with their commitment to responsible and convenient lending, NBFCs have already offered a three-month moratorium to their borrowers to help them maintain income stability. But NBFC’s too need to remain financially stable to continue to offer loans at an affordable cost. This is a complex challenge.
For urban-centric NBFCs, recovery in credit offtake will take more time since many borrowers were migrant workers and industries associated with a migrant workforce.
Once the moratorium period is over, it is realistic to expect, due to all accumulated obligations, that we will witness lesser capacity of borrowers to re-start their repayments form day Zero. Consequently, this can cause a domino effect, creating what we can call credit crunch and slowdown.
To avoid this ripple effect and to help stabilize the economy, NBFCs will need to provide the borrowers staggered EMI Plan starting with lower EMIs post moratorium period, in order to lower the burden on already stretched monthly budget, allowing some breathing space and also increasing chances for loans to be repaid in a regular manner.
NBFC’s ability to raise money at low cost highly depends on their risk rating. Today, with the ongoing moratorium and a prospect of defaults have already downgraded the rating for many brands, which might have potentially severe consequences, from access to liquidity, cost of new borrowings, and in a worst-case scenario even a credibility/trust crisis for the entire sector.
To avoid this NBFC’s should be able to tap into cheaper sources of finance, perhaps government backing and bonds, and the policy framework should enable this as a top priority.
One-time restructuring of existing loans can provide a huge relief both to borrowers and P&L of lenders. It will allow NBFCs to restructure borrowers’ loans in a way that it matches what they can repay. A restructured loan is a new loan that replaces the outstanding balance on a pre-existing loan with a lower installment amount. It can be paid over a longer duration of time.
The restructuring will, therefore, safeguard the NBFC’s books giving them room for raising fresh funds and in that manner help economic stability so that the cogs of the financial ecosystem can function smoothly and efficiently.
Ondrej Kubik is CEO at Home Credit India
First Published: IST