Micro-finance institutions (MFIs) and non-banking finance companies (NBFCs) could face challenges in mobilising monthly collections from their small retail customers after the government’s move to withdraw Rs 500 and Rs 1,000 notes. “MFIs lending to rural customers without access to bank branches and post offices may see some near term difficulty in collections,” said Saravana Kumar, CIO, LIC Mutual Fund.
“We believe NBFC-MFIs and small finance banks (SFBs) may not be significantly impacted in the long term considering the cash flows of the borrower segment are usually in the smaller denomination. However, there could be near term disruptions in the collection cycles along with a spike in over dues, which could put their liquidity strength and the disbursal cycle under pressure,” India Ratings said. “NBFCs catering to self-employed segments, SMEs and other small businesses which transact primarily in cash, may experience near term delays in payment due to difficulties by these customers in converting their holdings within the stipulated time,” Kumar said. Housing finance companies (HFCs) catering to the self-employed segment, particularly in small ticket loans may also experience payment delays, he said.
Similarly, loan against property (LAP) business faces asset quality risk because of aggressive lending practices of many banks and NBFCs. In this case, unaccounted income is taken into consideration while deciding on income eligibility and loan amount for a borrower. According to Ind-Ra, asset quality of retail asset financers, especially NBFCs which have developed expertise in the credit assessment of the informal segment and have built models around it to come under pressure in the short term. In the longer term, the implication could be a risk profile shift for the NBFCs, as the stronger borrower profile could potentially migrate to banks.
Over the medium term, the demand for real estate especially in the secondary market and tier-II cities where cash component as a proportion of transaction is significant could face a slowdown. The trickle-down effect could encompass the entire sector. This could adversely impact NBFCs and housing financiers with a large proportion of exposure (LAP/ mortgage) built with a self-employed customer profile, it said.