RBI NPA recognition norms: MSME loans by NBFCs will be one of the most impacted segments, says Crisil

While home loans and gold loans will be the least impacted, unsecured and micro, small and medium enterprise (MSME) loans will bear the brunt. Across multiple segments including home loans, vehicle loans, gold loans, unsecured, MSME finance, wholesale finance, and microfinance, the extent of the impact on gross NPAs of NBFCs will be highest in unsecured loans category at 1.5 to 3 per cent followed by 1 to 3 per cent in MSME loans.

‘MSME loans will be one of the most impacted segments. There are dual issues that have impacted the MSME sector. The first and second waves of Covid impacted MSMEs and unsecured segments more while large corporates were much less impacted. So that’s one headwind MSMEs have been facing essentially because their balance sheets are not as strong as large corporates. In terms of their ability or resilience to face something as unprecedented as a Covid pandemic, that is definitely lower. Also, recovery time for them will be higher in the days ahead,’ Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, Crisil Ratings told Financial Express Online

However, the increase in gross NPAs because of the revised recognition norms will be largely an accounting impact because, given the improving economy, the credit profiles of borrowers are not expected to deteriorate, Crisil said. Consequently, ultimate credit losses are not expected to change significantly. The RBI had recently changed the NPA recognition norms to a daily due-date basis instead of the month-end. NBFCs usually increase collection activity between the due date and the month-end, and as a result, their overdues decline by the end of the month. However, this flexibility doesn’t exist now.

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‘The impact (of changes in asset classification norms by RBI) would be across all borrower types such as consumers or corporates and not just MSMEs. But MSME lenders might be more impacted as they would have a higher proportion of loans under NPA and restructuring due to covid. However, the classifications shouldn’t lead to a surge of bad loans, it will lead to fewer bad loans being upgraded back to standard assets. Hence the provisioning and capital requirements could increase for NBFCs and banks,’ Aditya Damani, Founder, Credit Fair had told Financial Express Online.

In terms of return on assets (RoA), returns for NBFCs will remain subdued across segments this financial year even as pick-up is expected next financial year on the back of economic recovery. ROAs in the MSME segment is expected to dip to around 1.3 per cent this financial year from around 1.5 per cent in FY21 and nearly 2 per cent in FY20. In FY23, this is likely to be around 1.4 per cent, as per Crisil’s report titled NBFC revival in the post-pandemic era.

‘Loans to MSMEs will have a higher impact in terms of NPAs going up as compared to other segments. But we are seeing green shoots happening, collections have improved on MSME loans as well and things are on an upward trajectory,’ added Sitaraman. However, the agency noted that the assets under management (AUM) of NBFCs is expected to grow 8-10 per cent this FY on the back of improving economic activity and strengthened balance sheet buffers.