The recent rains and floods ravaged all the 14 districts of Kerala with damage most severe in 7 districts – Alappuzha, Ernakulam, Idukki, Kottayam, Pathanamthitta, Thrissur and Wayanad – which the state government has notified as flood / landslide affected. And the road to recovery would be long and arduous.
While it is too early to estimate the full impact of the deluge, particularly on Kerala-focused lenders including banks and non-banking finance companies (NBFCs), the near-term impact in certain product segments appears high.
CRISIL-rated NBFCs include gold loan financiers, microfinance institutions (MFIs), and providers of home, two-wheeler and commercial vehicle loans. Apart from these segments, CRISIL-rated banks also have significant exposure to micro, small and medium enterprises (MSME) segment in the state.
The near-term impact of loss of business, and low collection efficiency will be felt by all lenders as the flood affected borrowers would prioritise normalcy in life. The lenders would also seek to restore normal operations, including infrastructure, at their branches. Some MFIs and small finance banks (SFBs) have suspended collections till August 31, 2018.
The State Level Bankers’ Committee, Kerala, has announced a moratorium and rescheduling for crop loans, agri-allied activities, loans to micro and small enterprises and education loans. Additionally, loans to medium enterprises and housing loans are eligible for need-based moratorium and rescheduling. CRISIL understands that the recovery proceedings that have already started will also be stopped for three months.
The longer-term impact of the floods will depend on the product segment the entity is operating in. The MFI segment will feel the most pressure given the weakened credit quality of their borrowers. The loss of income-generating assets and savings, and the unanticipated damages caused by the floods, could impair the debt-servicing ability of borrowers. Consequently, delinquencies are likely to rise. The ability of MFIs to recover dues will depend a lot on the extent to which they engage with borrowers.
Two CRISIL rated, Kerala-focused banks have over 35% of their loan advances in the state. Their MSME exposure, particularly in the manufacturing sector, is likely to be most affected on account of likely loss of inventory and time required to restart operations. Therefore, delinquencies are expected to rise in this segment. But the long-term impact is not expected to be significant given the established nature of relationship with borrowers and reasonably high level of collateralisation.
The impact on vehicle and housing financiers would be minimal because of the secured nature of loans. Even in case of loss of vehicle or property, insurance proceeds that lenders receive directly will mitigate the risk to some extent.
Gold loan financiers would be least affected as they possess precious jewellery as collateral. Financiers may not resort to auctions immediately but if delinquencies continue to rise and stay elevated, they could do so.
CRISIL remains in discussions with the affected parties and will review the impact on their credit risk profiles. Any rating or outlook change will be announced subsequently.