Liquidity and asset quality risks for Indian NBFI to continue, says Fitch

The moratorium impact has varied across the different NBFI business models
India's non-bank financial institutions (NBFI) will continue to face near-term risks related to liquidity and asset quality though economic activity is picking after a nationwide lockdown to contain the coronavirus pandemic, said Fitch Ratings on Thursday.

The risks reflect the impact of the pandemic on borrowers' repayment capabilities, as well as the effects of the moratorium on collections, Fitch said in a statement.

The cash flow implications of the moratorium have not been uniform across the industry, affecting some NBFI 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”, Fitch said.

The moratorium impact has varied across the different NBFI business models. Amongst Fitch-rated issuers, 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.

“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”.

India's economy is expected to contract by five per cent in the financial year ending March 2021 (FY21). 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 FY20 results do reveal that many of the sector's largest competitors took proactive provisioning. But whether this was sufficient will depend on the extent of asset-quality deterioration in the coming months. The credit costs are expected to be elevated over the medium-term, Fitch said.

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