NBFCs expect higher credit loss on COVID-19 woes, says EY study

Non-Banking Financial Companies (NBFCs) are expecting higher credit loss as well as an increase in provision coverage rates, mainly due to the impact of the coronavirus pandemic, according to a study.

The study by leading consultancy EY is based on an analysis of the standalone financial statements of 42 NBFCs, including 14 Housing Finance Companies (HFCs), for the year ended March 31, 2020.

The companies have reported an "increase in Expected Credit Loss (ECL) allowance by 33 per cent and an overall increase in provision coverage rate by 26 per cent as at 31 March 2020 compared to the year ended 31 March 2019".

Further, COVID-19 impact accounted for 19 per cent of the ECL allowance as on March 31 this year.

As per the study titled 'Expected credit loss analysis for non-banking financial companies' released on Monday, there has been an overall increase in gross loans of NBFCs by 7.63 per cent and HFCs by 2.44 per cent.

"There was an increase in ECL allowance on stage 1 and stage 2 by 56 per cent as against 25 per cent increase in ECL allowance on stage 3 assets.

"ECL expense has increased by 219 per cent for the year ended 31 March 2020 as compared to year ended 31 March 2019. Also, the companies reported a COVID-19 impact of 32 per cent of the ECL expense for the year ended 31 March 2020. The cost of risk ratio has increased by 202 per cent," EY said.

Stage 1 refers to loans with no significant increase in credit risk while Stage 2 indicates loans with significant rise in credit risk. Stage 3 refers to credit impaired loans.

NBFCs analyse co-relation of a wide range of factors with their default patterns and shortlist the factors relevant to their respective businesses to take into account the impact of forward-looking information. ECL estimates are then adjusted to consider the impact of these short-listed factors.

Sandip Khetan, Partner and National Leader (Financial Accounting Advisory Services) at EY India said the increase in ECL allowance seems to be largely attributable to the impact of COVID-19 and other macro-economic factors.

The study evaluated the change in ECL allowance and expense, change in provision coverage rates, the magnitude of the COVID-19 impact and other key parameters.

Jigar Parikh, Partner (Financial Accounting Advisory Services) at EY India said as NBFCs gear up for financial results for the coming quarters as well as the year end, they will have to consider the impact of the challenges on the economy, additional insights on the economic impact of the pandemic and several regulatory developments as a part of stimulus packages provided by the government.

"ECL estimates may have to be revised in the wake of these developments," he added.

The coronavirus pandemic and subsequent lockdowns to curb the spreading of infections had disrupted the economy and business activities are slowly reviving now.

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