Extensive recovery efforts by non-banking financial companies (NBFCs¹), coupled with the recent uptick in economic activity, has lifted the median collection efficiency ratios of Crisil-rated securitised pools for November 2020 payouts (October 2020 collections) to their highest levels in fiscal 2021, and near pre-Covid-19 pandemic levels for most asset classes.

Collection of loan instalments had substantially reduced in the immediate aftermath of the stringent lockdown announced in late March 2020, and subsequently, extension of moratorium on loan repayment to borrowers (under the Covid-19 regulatory package announced by the Reserve Bank of India).

Later, as the unlocking process gathered pace, lenders mobilised their on-ground recovery staff to ramp up collections. In a September 2020 press release², Crisil had highlighted that a recovery was underway in the collection efficiency of its rated securitised pools.

Says Krishnan Sitaraman, Senior Director, Crisil Ratings, “The monthly collection efficiencies of most Crisil-rated securitised pools are almost at pre-pandemic levels. That’s because economic activity has been gathering steam in recent months, and agricultural activity, which was less impacted, has steadily picked up, too. As cash flows improved, borrowers have started repaying their loan instalments.”

Median collection ratios for November 2020 payouts for commercial vehicle loan pools jumped up to 93% from a paltry 24% in May 2020. That compares with 98-99% in January-March 2020. Collection efficiency for mortgage-backed loans, comprising largely home loans and loans against property, were around 96% in October-November 2020. In comparison, median collection ratios were 99% in March 2020 and around 71% in June 2020.

However, pools backed by loans to small and medium enterprises (SME) saw a slight drop in collection efficiency in November, as underlying businesses and borrower cash flows are yet to achieve stability.

Median collection efficiency of pools backed by microfinance loans, which saw a precipitous decline in April and May 2020, had recovered sharply to above 70% for September payouts. But since then, the number has only crawled up slowly as cash flows of vulnerable borrowers in the segment are yet to reach pre-pandemic levels due to localised factors. Median collection ratios were at 82% for November 2020 payouts, still below business-as-usual levels of 98-99%.

Microfinance borrowers are considered most susceptible to economic vagaries and their progression towards pre-pandemic business levels was expected to be gradual and incremental. However, as NBFCs in general, including microfinance institutions, further intensify collection efforts, underlying pool collections should continue to improve.

NBFCs have also improved their collection processes in the recent past. Previously, digital modes were considered secondary to the traditional, physical cash collection process. However, in the past six months, lenders have leveraged technology and redoubled efforts on the digital side. Many NBFCs now offer both facilities to borrowers for repayments.

Says Rohit Inamdar, Senior Director, Crisil Ratings, “While digitalisation is a low-cost and efficient tool, pool collections will continue to be influenced by economic factors. The imposition of localised restrictions could also impact business cash flows and thereby, collections. Broad-based economic recovery is the best way to prevent local issues from creating asset-quality challenges.”

After the November 2020 payout, there is adequate credit cover at outstanding rating levels for most Crisil-rated transactions. Crisil will closely monitor securitised pools under its surveillance, including collection ratios, past trends, and underlying asset quality; and take appropriate rating actions in the event of slower recovery in collections over the next few months, or higher-than-anticipated delinquencies.

¹ NBFCs includes housing finance companies (HFCs) and micro-finance institutions (MFIs)
² Link: https://crisil.com/en/home/newsroom/press-releases/2020/09/securitised-pool-collections-rebound-from-lows-of-april.html