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Moody’s Raises Red Flag On Liquidity, Solvency Of India’s Non-Bank Lenders

India’s non-bank lenders will face increased liquidity and solvency strains as economic activity slows due to Covid-19.

Reeling under tight liquidity conditions, NBFCs and HFCs begin relying on loan sell-downs to banks to raise funds. (Photographer: Dhiraj Singh/Bloomberg)
Reeling under tight liquidity conditions, NBFCs and HFCs begin relying on loan sell-downs to banks to raise funds. (Photographer: Dhiraj Singh/Bloomberg)

India’s non-bank lenders will face increased liquidity and solvency strains as economic activity slows due to the spread of Covid-19, according to Moody’s Investors Service.

Non-banking financial institutions are more at risk than banks due to exposure to riskier lending segments, the rating agency said in a note, adding that large bank exposure to these entities could also imply greater systemic risks.

Moody’s sees three key risks.

  1. The weakening economy will accelerate a deterioration of asset quality at NBFCs.
  2. Cash flows will decline significantly due to the three-month moratorium offered by the Reserve Bank of India and weaker asset quality will further reduce repayments.
  3. The weakening solvency profile of NBFCs could pose a financial stability risk.
We expect a significant weakening in asset quality at NFBIs, that will worsen the liquidity stress triggered by the three-month moratorium on customer loan repayments.
Srikanth Vadlamani, Vice President, Moody’s Investors Service

Asset Quality Risks

Moody’s sees NBFCs focused on corporate, real estate and unsecured retail loans as being most vulnerable.

  • Corporate and real estate borrowers had been facing liquidity constraints even before the onset of the coronavirus outbreak. Stress among them will further worsen as heightened risk aversion among lenders and investors makes it more difficult for them to raise funds.
  • NBFCs lending to individuals working in the informal part of the economy or those who are self-employed are also at risk as the income of these borrowers tends to be more unstable.
  • Quality of loans to finance commercial vehicles will also deteriorate as the performance of these loans is highly correlated to economic conditions. However, these borrowers tend to make best efforts to repay and avoid losing their vehicles because their livelihoods often depend on their vehicles.

NBFCs focused on a combination of these borrower segments will be most susceptible to loan losses, the rating agency said.

Moody’s Raises Red Flag On Liquidity, Solvency Of India’s Non-Bank Lenders

Worsening Liquidity Stress

A decline in loan repayments, the rating agency said, will significantly strain the liquidity position of NBFCs.

  • Moody’s expects NBFCs to offer the RBI permitted moratorium to most of their customers, which will drain near-term liquidity. Moratoriums on loan repayments will result in substantial declines in cash inflows over the next few months, it said.
  • The extent of liquidity stress will depend on the number of customers seeking moratoriums and the degree of the economic shock. Moody’s estimates, as a base case scenario, that loan repayments will drop by 50 percent during moratorium periods.
  • Heightened risk aversion among investors means NBFCs will continue to have difficulty obtaining funding.

With limited access to new funding, they will have to manage their liquidity through liquid assets on their balance sheets and customer loan repayments, Moody’s said.

Responding to the Moody’s report, Edelweiss Financial Services pointed to their third quarter investor presentation. As per that presentation, the company’s overall liquidity stood at Rs 10,300 crore, which is 22 percent of balance sheet. It includes undrawn bank lines of Rs 700 crore. The company also said it has repaid borrowings of Rs 5,100 crore during the quarter ended December 2019.

The company is yet to report its earnings for the March 2020 ended quarter.

Moody’s Raises Red Flag On Liquidity, Solvency Of India’s Non-Bank Lenders
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Government Measures Not Enough?

In the face of the large challenges that these institutions may face, the scale of government measures announced may not be enough.

The government has announced a plan to purchase Rs 30,000 crore in government debt via a special purpose vehicle. “The amount of the planned debt purchase by the government equals only about 2 percent of total outstanding debt at the 20 largest NBFCs that account for nearly 75 percent of total sector debt,” said Moody’s.

Under a separate scheme, the government will provide partial credit guarantee of up to 20 percent for first loss on new debt issued by NBFCs with lower rating. The size of the scheme is Rs 45,000 crore. The effectiveness of the scheme may be limited since it provides only partial guarantee, Moody’s said.

Overall, we do not expect the latest government measures will reduce risk aversion among banks and capital markets toward NBFCs, and their access to funding will remain limited.
Moody’s Investors Service

Should asset quality at NBFCs deteriorate, banks could see an impact as well. Banks with the largest exposure to NBFCs include Bank of Baroda, Union Bank, Canara Bank and Punjab National Bank, among government-owned lenders. Among private banks, Axis Bank Ltd. and IndusInd Bank Ltd. have the largest exposures.

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This story has been updated to include a comment from Edelweiss Financial Services and reflect revised liquidity data for Edelweiss presented by Moody’s Investors Service in its report a day after it was first published.