India’s non-bank financial corporations (NBFCs) face renewed asset quality and liquidity risks as the country battles a new surge in coronavirus infections, analysts said. There could be a drop in securitization volumes, as seen in the first half of 21, negatively affecting non-bank lenders.
The economic impact of the various restrictions imposed by states will depend on their duration and severity. The widening of limits could derail the fragile recovery in India’s NBFC sector since a nationwide lockdown was gradually eased from mid-2020, rating agency Fitch said Thursday.
“SMEs (small and medium-sized enterprises), utility vehicle operators, microfinance and other large borrowers remain at greater risk of stress in this environment, especially as the financial buffers have reportedly narrowed after the severe economic shock of last year. Production and supply chains remain susceptible to labor shortages if large-scale urban-to-rural labor migration in 2020 recurs, ”Fitch said in a note.
At the same time, regulators appear to be keenly aware of the credit and liquidity implications of any broad and extensive restrictions on movement, while the day-to-day operations of NBFCs should also be able to continue under the latest rules.
A resurgence of pressure on asset quality for NBFcs could lead to further funding strains for the sector, especially as many government programs that provided financial assistance to NBFCs in 2020 have expired. These include the partial credit guarantee scheme supporting asset-backed securitization and a special liquidity scheme providing short-term funding relief guaranteed by the state. At the same time, the extension of the Emergency Credit Line Guarantee Scheme (ECLGS) for SMEs until June 2021 will provide these borrowers with additional respite.
Icra Ratings said that due to the Covid-19 pandemic and resulting national lockdowns, securitization volumes experienced an unprecedented decline in the first half of 21 after two successive years of healthy volumes close to Rs 2 lakh crore each. As economic activity gradually picked up and loan disbursements picked up, even reaching pre-Covid levels for some NBFCs, the securitization market saw a sharp rise in volumes during the second. semester 21. According to the rating agency’s estimates, securitization volumes for FY21 were around Rs 85,000 to 90,000 crore, of which fourth quarter volumes contributed nearly 45%.
Abhishek Dafria, vice president and head of structured finance ratings, Icra, said the increase in Covid cases could again create uncertainty among investors. While the lockdowns announced so far are less restrictive compared to the nationwide lockdown seen last year, a steady rise in Covid cases is likely to raise fears of tougher lockdowns that could impact loan asset quality. Retail. “This in turn would impact the fundraising capacity of NBFCs and HFCs through the securitization of their assets. The successful implementation of the vaccination program and the ability of government agencies to stop growing infections would remain essential in the short term, ”said Dafria.
Among its rated issuers, Fitch considers IIFL Finance to be the most vulnerable to recent developments due to its exposure to affected states and high-risk developers, SMEs and microfinance. Shriram Transport Finance Company is also relatively exposed due to its focus in commercial vehicle finance, although critical goods volumes may provide compensation in affected areas.