NBFC sector under pressure as Covid-19 cases rise, lockdowns resume: Fitch

India's non-bank financial institutions (NBFC) face renewed asset quality and liquidity risks as a second wave of coronavirus infections sweeps the country and could delay recovery in the sector, said Fitch Ratings.

The agency said challenges are likely to increase if recent restrictions to contain the pandemic are expanded or prolonged, leading to greater economic and operational disruption.

Fitch revised India's economic growth forecast for the fiscal year ending March 2022 (FY22) to 12.8 per cent in March 2021, from 11 per cent in the previous forecast in December, due to the unexpectedly strong rebound in economic activity in late 2020 and early 2021.

The forecast revision incorporated expectations of a slowdown in second hafl of Q21 due to the flare-up in new coronavirus cases. However, an increase in the rate of infections and broadening of social distancing restrictions pose downside risks to projections.

India states have announced curbs like curfews and weekday restrictions till end of April to contain the pandemic. Fitch said the economic impact of these curbs will depend on their duration and severity. Expanded curbs could derail the fragile recovery in India's NBFC sector since a nation-wide lockdown was gradually relaxed from mid-020.

SMEs, commercial vehicle operators, microfinance and other wholesale borrowers remain at greater risk of stress in this environment, particularly as financial buffers would have narrowed after the severe economic shock over the past year. 

The production and supply chains remain susceptible to labour shortages if the large-scale urban-to-rural labour migration in 2020 recurs.

Fitch said authorities have gained experience in balancing the trade-off between tighter restrictions and maintaining economic activity over the past year. The national government and authorities in several states have indicated that fresh restrictions will not be as extensive as those in April-June 2020, particularly as vaccine rollout progresses.

Consumers and businesses are also likely to better adapt their economic activity to the second wave of restrictions, as seen in other countries. Regulators appear keenly aware of the credit and liquidity implications of any broad, extended movement curbs, while NBFIs' day-to-day operations are also likely to be able to continue under the latest rules.

A resurgence in asset-quality pressure for finance firms could lead to renewed funding strains for the sector, particularly as many government schemes that provided funding relief to NBFIs in 2020 have expired. These include the Partial Credit Guarantee scheme supporting asset-backed securitisation and Special Liquidity Scheme providing government-guaranteed short-term funding relief.

Meanwhile, the extension of the Emergency Credit Line Guarantee Scheme for SMEs till June 2021 will offer such borrowers further breathing room.

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