Covid-19 pandemic will lead to further deterioration in asset quality of non-bank financiers, a segment that is more exposed to the downturn than banks, said a report by Moody’s Investors Service.
“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,” the report said. Asset quality at these lenders has weakened in recent years amid worsening economic conditions, and the shock from the coronavirus outbreak will exacerbate this trend, it added.
Given how significant exposure banks have to the non-bank financiers, Moody’s expects that the weakening solvency will, in turn, pose risks to the stability of the broader financial system.
“We expect a significant weakening in asset quality at NFBCs, that 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 Rs. 8.07 trillion to non-bank financiers as on 27 March, up 26% from the same period last year, showed data from the Reserve Bank of India (RBI).
According to the rating agency, NBFCs are more exposed than banks to the coronavirus-led downturn, given their focus on riskier segments, and in particular corporates and the real estate
sector which were facing liquidity constraints even before the outbreak.
Funding costs are higher for NBFCs than banks because they lack access to low-cost retail deposits and therefore need to earn higher asset yields by focusing more on riskier borrowers. Moody’s pointed out that in both home loans and loans against property, NBFCs have a higher share of loans to borrowers working in the informal sector and self-employed employees than banks.
“To alleviate borrower stress, the Reserve Bank of India (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, Moody’s said, will depend on the number of customers seeking moratoriums and the degree of the economic shock. The longer restrictions on economic activity remain, the longer it will take for loan repayments to return to normal levels even after moratorium periods end, it said.
The rating agency added that while the government’s measures to directly subscribe to Rs. 30,000 crore of NBFC debt, will provide some near-term relief, this will not sufficiently address their structural funding issues.