NBFI sector gross NPL ratio eases to 13.1%

• Negative growth in sector loans caused elevated NPL ratio
• But now settled at levels lower than many feared

The non-bank financial institutions (NBFI) sector’s non-performing loan (NPL) ratio softened in August, from the highest levels reached in June, indicating that the worst of the troubles facing the sector are alleviating, although the current state does not by any means provide indications that the risks are over. The NBFI sector gross NPL ratio eased to 13.1 percent by end-August, from 14.14 percent reached in June, breaking a more than three-year long upward run.

This could also defy the worst forecasts made for the sector asset quality by experts, analysts and economists. 
First Capital Research predicted the sector NPLs to peak at 20 percent in 2021, with the gradual phasing out of the moratorium afforded to pandemic-affected borrowers, in a report titled ‘All Doom & Gloom For NBFIs’, 
issued last month. 

But the fact that 13.1 percent of all loans and advances in the sector are in default doesn’t provide the sector to rest on its laurels, as there is much to be done to rein in the loans falling into default, if the economy doesn’t hold up its current recovery momentum. 

However, the sector’s asset quality woes are purely not related to borrowers’ defaulting their loans but rather the sector hasn’t seen its loans growing for a long time, which could have blunted the asset quality impact to some degree.  The sector’s gross loan growth has been on a decent since end-2015, with the busting of artificial credit-driven boom, which forced the then government to seek a bailout from the International Monetary Fund (IMF). In return, the IMF wanted the Central Bank to jack up interest rates and government to adopt an austerity approach and increase taxes.

“Deterioration of assets was mainly due to reduced loans and advances. The loans and advances portfolio reduced by 2.5 percent (Rs.27.3 billion) at end-August 2020, due to the economic slowdown and restrictions on vehicle imports,” the Central Bank said.