NBFCs will continue to face liquidity, asset quality risks: Fitch2 min read . Updated: 02 Jul 2020, 12:58 PM IST
- These risks reflect the impact of the coronavirus pandemic on repayment capabilities of borrowers and the effect of moratorium on collections
- Fitch expects near-term inflows to remain below pre-pandemic levels and to improve only gradually as economic activity gathers pace
MUMBAI: India's non-bank financial companies (NBFCs) will continue to face elevated liquidity and asset quality risks, even as economic activity picks up with the easing of the nationwide lockdown, according to global rating agency Fitch Ratings.
These risks reflect the impact of the coronavirus pandemic on borrowers' repayment capabilities and the effect of moratorium on collections.
According to the rating agency, the cash flow implications of the moratorium, which regulators have extended to end-August, have not been uniform across the industry, affecting some NBFC liquidity profiles more materially and placing pressure on their ability to repay or refinance upcoming obligations. “We expect near-term inflows to remain below pre-pandemic levels and to improve only gradually as economic activity gathers pace," it said.
NBFCs typically borrow from banks and on-lend it to a wide variety of sectors such as automobiles, retail and small enterprises. Non-banks, facing a liquidity shortage ever since Infrastructure Leasing and Financial Services Ltd defaulted on its payment obligations, have been under renewed strain as banks have been selective in giving moratorium to them.
The rating agency highlighted that the moratorium impact varied across different NBFCs. Companies like IIFL Finance and Shriram Transport Finance Company have had a higher proportion of collections affected by the moratorium than conventional gold lenders, such as Muthoot Finance and Manappuram.
“We believe the moratorium will erode payment discipline and its extension will result in lagged asset-quality problems for NBFIs, particularly when combined with the economic damage from the pandemic and lockdown," Fitch said. “Asset quality indicators did not show significant deterioration in FY20, but regulatory guidance around impaired-asset recognition indicates that the true extent of the damage may only become visible in FY22. This lack of transparency will complicate the sector's fund raising efforts."
The rating agency also noted that while many NBFCs have taken proactive provisioning, credit costs will continue to be elevated and therefore these companies may have to increase future provisioning depending on the extent of asset quality deterioration.
NBFCs could also face challenges over fund raising despite the softening of borrowing costs. While the interest rate spread for the non-bank lenders have narrowed since mid-May, liquidity remains tight for these companies except gold loan companies. The three-year 'AAA' NBFI index spread over the government securities of the same maturity fell to 174 basis points on 29 June, from 270 basis points on 15 May. That said, NBFCs, mostly high rated ones, were the largest issuers of corporate bonds in the first quarter as they availed of the surplus liquidity available in the system.
The rating agency noted that even equity raising could be difficult in the near-term for all but the most established companies. Among the major NBFCs, Shriram Transport and Mahindra & Mahindra Financial Services have recently announced equity rights issues to be completed in the coming months.