NBFCs more vulnerable to covid than banks: Moody’s
- Asset quality of NBFCs is likely to deteriorate with pandemic deepening economic slowdown
- Moody’s expects the liquidity stress caused by the moratorium on loans to worsen with time
Disruptions caused by the covid-19 pandemic will lead to further worsening of asset quality of non-bank financiers, a segment that is more exposed to the downturn than banks, Moody’s Investors Service said on Tuesday.
“Asset quality at non-banking financial companies (NBFCs) will significantly deteriorate as economic disruptions from the coronavirus outbreak deepen an economic slowdown that has been underway in the past few years,” Moody’s said in a report.
The asset quality of these lenders has weakened in recent years amid worsening economic conditions, which will be exacerbated by the economic shock from the coronavirus outbreak, it said.
Moreover, the weakening solvency will, in turn, pose risks to the stability of the broader financial system, given the significant exposure of banks to non-bank financiers, contends Moody’s.
“We expect a significant weakening in asset quality at NFBCs, which will worsen the liquidity stress triggered by the three-month moratorium on customer loan repayments,” said Srikanth Vadlamani, vice-president and senior credit officer, Moody’s.
Indian banks have lent ₹8.07 trillion to non-bank financiers as on 27 March, up 26% from the same period last year, according to data from the Reserve Bank of India (RBI).
NBFCs are more exposed than banks to the coronavirus-led downturn, given their focus on riskier segments, in particular corporates and the real estate sector, which were facing liquidity constraints even before the outbreak, said the rating agency.
Funding costs are higher for NBFCs than banks because they lack access to low-cost retail deposits and thus need to earn higher asset yields by focusing more on riskier borrowers. NBFCs have a higher share of loans to borrowers working in the informal sector and self-employed employees than banks, in both home loans and loans against property, Moody’s pointed out.
“To alleviate borrower stress, RBI is allowing financial institutions to provide three-month moratoriums on loan repayments. These measures represent a significant drain on near-term liquidity at NBFCs, as most primarily manage liquidity by matching cash inflows from loan repayments with cash outflows to repay their own liabilities,” the report said.
The extent of liquidity stress will depend on the number of customers seeking moratoriums and the degree of the economic shock, Moody’s said.
The longer restrictions on economic activity remain due to the nationwide lockdown, the longer it will take for loan repayments to return to normal levels even after the moratorium period ends, said the rating agency.
The government’s measures to directly subscribe to ₹30,000 crore of NBFC debt will provide some near-term relief, but will not sufficiently address their structural funding issues, Moody’s pointed out.
“The weakening solvency of NFBCs will also increase pressure at banks at a time when risks to systemic stability are already elevated following the Yes Bank default, which triggered deposit outflows at some smaller banks,” said Vadlamani.
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First Published:20 May 2020, 12:39 AM IST
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