The nightmare for India’s besieged non-bank financial corporations (NBFCs) seems to have no end.

After the economic slowdown and liquidity crisis, now the impact of the Covid-19 pandemic weighs heavily on the balance sheet of Indian NBFCs. A key indicator of this pressure is the growing number of Stage 3 assets, which have been in default of loans for more than 90 days. The number of such accounts increased during the October-December period for most of the major NBFCs in India.

As part of a Covid-19 relief plan, the Reserve Bank of India allowed borrowers to suspend repayment loans without impacting their credit history between March and August. But with the lifting of the moratorium, borrowers still do not seem to have the capacity to repay.

The build-up of stress for most of these lenders is a side effect of the moratorium on loans they offered to clients during the initial period of foreclosure, according to Mumbai-based brokerage firm Emkay Global Services.

The growth of bad loans is causing problems not only for the $ 350 billion NBFC sector, but also for the Indian economy as a whole. If the lending capacity of NBFCs is reduced due to increased bad debts, consumption or demand could still weaken.

NBFCs face increase in bad debts

Even NBFCs that have had an impeccable track record so far, like Bajaj Finance, are faltering. Job losses and wage cuts continue, Bajaj Finance, which mainly provides personal loans, faces an increase in defaults.

Stage 3 bad loans at Bajaj Finance nearly doubled to 2.87% of the overall loan portfolio in the December quarter from 1.34% in the September quarter.

The impact of the slowdown induced by Covid-19 on household income is clearly visible through the balance sheets of the NBFC. Mahindra Finance, Cholamandalam Finance and Magma Fincorp, which largely provide tractor and vehicle loans, are also experiencing increased stress levels. During the December quarter, their Stage 3 assets also exploded.

NBFCs lose market share

In addition to the deterioration in asset quality, the corporate lending sector is also facing a series of challenges.

NBFC growth has stuttered as customers migrate to banks, which offer lower interest rates, Emkay Global Services said. As a result, NBFCs are losing market share to banks, especially in the housing and automotive segments.

With the NBFCs facing a double whammy of losing market share and weakening asset quality, there doesn’t appear to be a respite in sight for them anytime soon.

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