The finance sector is considered to be the lifeline of the economy. The pandemic cast a dark shadow over the sector as it grappled with several issues, including poor asset quality, liquidity crisis in the NBFC space, higher demand for digital-payment channels and so on.
Initially, financial stocks took a beating out of the fear of an increase in NPAs and the liquidity crisis. Also, with the Supreme Court putting a stay on classifying new accounts as non-performing assets (NPA) as on August 31, a reduction in NPAs across many banks was seen. The NPAs may shoot once the restrictions are uplifted and it might be too soon to judge the impact of the pandemic on banks. Further, the proceedings under the Insolvency and Bankruptcy Code have been held up till March 2021. This will delay the recovery of existing NPAs. Still, an uptick in economic growth will positively impact the performance of the financial sector. The reopening of the economy and a faster-than-anticipated recovery in the lead indicators of economic growth have accelerated the pace of recovery in the banking sector.
Unlike banks, non-banking financial companies (NBFCs) had to face twin challenges of asset quality and the availability of funds. With the ongoing liquidity crisis among NBFCs, owing to the fallout of IL&FS and DHFL episodes, the crisis was exacerbated by the pandemic, lockdown and the slowdown in economic activity. Given the stress in the NBFC space, the RBI has recently issued guidelines for restricting the distribution of dividend by NBFCs until they comply with minimum prudent requirements.
Winners
Muthoot Finance: The country's largest gold-financing company in terms of the size of the gold-loan portfolio has reaped the benefits of rising gold prices. Its consolidated loan AUM grew by 29 per cent YoY to `52,286 crore during Q2FY21 on the back of an increase in loan-to-value to 61 per cent in Q2 as compared to 55 per cent in Q1. The growth was coupled with improving asset quality. The management guided gold-loan growth of over 15 per cent YoY for FY21.
Cholamandalam Investment: This NBFC has been an outlier. In the quarter ended September 2020, the company registered growth of 11 per cent in interest income and 12 per cent growth in profits. This higher profitability can be attributed to the lower cost of funds, which has declined to 6.9 per cent from 7.7 per cent during the same quarter last year. However, during the quarter, the average disbursements in Q2FY21 declined by 13 per cent, as the management is believed to be prudent on the credit-quality front. On the moratorium, 95 per cent customers who availed this facility have started repaying their instalments.
Losers
SBI Cards: The COVID-19-led economic devastation showed up in Q2 numbers of the company. Had there not been any ruling on standstill accounts, the company's gross non-performing assets would have jumped by five times to 7.5 per cent in Q2FY21 from 1.5 per cent in Q1FY21. A spike in the provisioning for bad loans led to the quarterly net profit falling by 46 per cent in Q2FY21. The company has offered a one-time resolution to eligible customers by offering them the option to convert their credit-card dues into EMls of up to 24 months. However, the full extent of the economic impact on retail borrowers still remains unclear.
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