Collection ratios in securitised pools have dipped during the second wave of the Covid-19 pandemic. However, unlike in the first wave, the decline has not been as sharp for two reasons: localised restrictions limited the impact on business activity, and lack of moratorium from lenders meant that borrowers could not postpone their debt repayments.
Non-banking financial companies have been also reworking their collection process since the onset of the pandemic by increasingly adopting electronic modes such as auto-debit, payment gateways and dedicated applications.
Such productivity enhancement was one of the reasons for the sharp recovery in collection ratios of securitised pools during the second half of last fiscal.
As more businesses set up online modes for business continuity, their cash flows become less prone to disruption.
Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, "In the first wave, collections fell as the majority of borrowers availed of moratorium relief and collections staff were unable to move around due to the stringent lockdowns. This prompted many financing entities to explore digital collection - an avenue that has played an important role in preventing a similar fall in collections during the second wave."
Mortgage loans remained the most resilient of all asset classes. Indeed, for mortgage and even commercial vehicle loans, the median collection ratio for the April 2021 payout was higher than the pre-pandemic average, indicating a sharp uptick in collections towards the end of fiscal 2021 (the April 2021 payout would reflect pool collections during the previous month, i.e., March 2021).
While commercial vehicle loans saw a dip in median collection ratios of almost 11 percentage points in May 2021, we expect the collections to improve going forward in line with the recovery expected in the economic activity. In fact, last fiscal their collection ratios started rising sooner compared with other segments, driven by the sharp recovery in economic activity during the second half.
MSME (micro, small and medium enterprises) and microfinance borrowers are relatively more vulnerable and pools comprising these asset classes reflect as much with decline in median collection ratios in May 2021 of 12 percentage points and 6 percentage points respectively. Imposition of localised lockdowns and spread of the pandemic resulted in the borrower's cash flows getting impacted and also led to restrictions in the movement of the collections staff of lenders. Further, the health of a number of borrowers and collections staff was also affected due to the pandemic. However, the impact on collections was far lesser compared to the first wave when quite a large number of borrowers availed the benefit of moratorium and did not pay their instalments.
Interestingly, the two wheeler loan backed pools have seen a relatively lower impact of the second wave so far. These borrowers seem to have benefitted from the government's focus on rural areas and thrust on agriculture.
As the second wave subsides, financing institutions are expected to make their business models more robust to incorporate resilience to such disruptions in their normal course of business. While the focus is on collections from borrowers, lenders would benefit also by evolving suitable business models embracing digitisation for origination as well.
Says Rohit Inamdar, Senior Director, CRISIL Ratings, "The pace of vaccinations will be a critical input for a full, unhindered reopening of economic activity. While the country moves towards pre-pandemic normal in several other aspects, digital collections are expected to continue, and digital originations may also make their way, given the low cost of managing these and the ease they offer to borrowers."