Money & Banking

Liquidity, asset-quality will remain challenging for NBFIs: Fitch Ratings

Our Bureau Mumbai | Updated on July 02, 2020 Published on July 02, 2020

Fitch estimates that many NBFI issuers may experience negative near-term liquidity flow as long as collections remain depressed   -  Reuters

Fitch Ratings expects liquidity and asset-quality challenges to remain as key issues for the non-banking finance institution (NBFI) sector, as companies navigate the pandemic-led disruption in the months ahead.

The global credit rating agency said NBFIs’ near-term collections are likely to remain below pre-pandemic levels and will improve only gradually as economic activity gathers pace.

“The regulator has allowed loan moratoriums to be extended till end-August, which will further delay repayments.

“This, along with constrained funding conditions, will continue to pressure NBFI liquidity, though near-term liquidity coverage (liquid assets and undrawn credit lines) remains adequate for Fitch-rated NBFIs,” said Siddharth Goel, Associate Director, and Elaine Koh, Director, Fitch Ratings.

Fitch estimates that many NBFI issuers may experience negative near-term liquidity flow as long as collections remain depressed.

The agency said some gold-backed lenders will be less affected due to their fast-maturing assets, while housing finance companies (HFC) could face greater liquidity issues due to their longer-tenor exposure.

Moratorium poses asset-quality risk

Referring to how the high moratorium take-up — above 50 per cent in some NBFIs — will cloud asset-quality trends, Fitch expects higher non-performing loans (NPLs) once this relief expires, despite improved collections since April. This will add to the existing NPL pressure evident in vehicle and real estate finance.

“Deteriorating corporate and SME earnings are likely to weaken asset-quality in the commercial vehicle, business and construction finance. Secured retail loans, such as housing and gold loans, should be more resilient, while unsecured loans are more at risk,” the agency said.

Weakened Profitability

Fitch assessed that credit costs are likely to stay high in FY21, after rising to a peer-group average of 1.7 per cent of gross loans in FY20, from 0.7 per cent in FY19, partly on pre-emptive pandemic-related provisions.

This, along with low loan growth, will continue to dampen NBFIs’ profitability, particularly for HFCs and commercial loan providers. Gold lenders should maintain stable returns.

Steady leverage

The agency expects lower loan growth and selective equity-raising activity to ease any pressure on leverage, though access to the latter may be limited to stronger NBFIs. However, severe asset-quality stress for construction financiers may lead to capitalisation pressure for this segment, even as access to new capital may be challenging, it added.

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Published on July 02, 2020
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