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The challenges for India’s Non-Bank Financial Institutions (NBFI) will intensify as local measures to contain the spread of the coronavirus (COVID-19) exert pressure on their operating performance and financial profiles, according to a report by Fitch Ratings.
Government-imposed activity restrictions in India will raise operational complications for NBFIs, while any escalation in local infections will deal a blow to the economic sentiment. These developments threaten to derail the incipient recovery in India’s credit environment following the NBFI crisis in 2018-19, Fitch said.
The initial disruptions to regional manufacturing supply chains from a lockdown in China as the coronavirus spread have now broadened to include local discretionary spending and exports even as parts of China return to work. Fitch now expects a global recession this year and recently cut its GDP growth forecast for India to 2 per cent for the fiscal year ending March 2021, after lowering it to 5.1 per cent previously.
This would make it the slowest growth in India over the past 30 years, it added.
Reduced spending
Micro, small and medium-sized enterprises and the services segment are likely to be among the most affected amid reduced consumer spending. These segments can comprise a significant part of the loan portfolio for some non-bank lenders, though they form just 8 per cent of system NBFI credit as a whole.
NBFIs’ business borrowers are typically smaller with more limited cash buffers, and any material fall in earnings is likely to affect their ability to repay their loans directly.
Other loan classes that are likely to have greater exposure include commercial-vehicle lending due to the segment’s direct correlation with business activity, microfinance loans, and construction funding as work is delayed and property sales will take time to recover from the hit to sentiment. Meanwhile, short-tenor asset classes such as consumer-durable and gold loans may face portfolio run-offs as fresh disbursements are curtailed, affecting profitability.
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