Non-banking finance companies (NBFCs) face a double-whammy because they are offering a loan moratorium to customers despite not getting one themselves from their lender-banks amid the pandemic, according to CRISIL’s credit alert.
If they are unable to avail the moratorium announced by the RBI as part of a Covid-19 reglatory package on their own bank borrowings, the liquidity cover available with CRISIL-rated NBFCs will decline sharply, the credit rating agency said.
A credit alert is CRISIL’s opinion on a sharp and specific development. It conveys that the agency will revert shortly on the impact of the development on the ratings of those affected. Liquidity cover is measured as ‘cash available with NBFC + unutilised bank lines/debt falling due’.
Liquidity pressure
CRISIL’s analysis of the NBFCs it rates (comprising NBFCs, housing finance companies and microfinance institutions, but excluding government owned non-banks; constituting around 90 per cent of the industry’s assets under management) shows liquidity pressure will increase for nearly a quarter of them if collections do not pick up by June 2020. These NBFCs have ₹1.75-lakh crore of debt obligations maturing by then.
The agency emphasised that with collections minimal and the moratorium only for their borrowers, raising fresh funds is critical, especially because NBFCs, unlike banks, do not have access to systemic sources of liquidity and depend significantly on wholesale funding.
“To be sure, ₹1-lakh crore has been made available through the RBI’s Targeted Long-Term Repo Operations (TLTRO) window. However, only half of that is earmarked for primary issuances. Also, an expected scramble for funds means corporates and government-owned financiers will also be interested in this window. Consequently, only higher rated NBFCs may end up benefiting,” CRISIL said.
Mutual funds, a large investor base for higher-rated NBFCs, have been facing redemption pressure and therefore are unlikely to be a material source of fresh funding or refinancing. And securitisation, which many NBFCs were relying on so far, may also not see much transactions in the near term because of the moratorium.
Small players hit hard
While larger and better-rated NBFCs may still be able to manage the situation, the agency underscored that smaller or lower rated NBFCs, which have significant dependence on bank funding, will find the going extremely tough. Measures such as enhancement in bank lines, ad hoc or special Covid-19 credit lines from banks, would offer only a partial relief to the sector.
Krishnan Sitaraman, Senior Director, CRISIL Ratings, said: “Given the challenges in access to fresh funding, and presuming nil collections, CRISIL’s study underscores that a number of NBFCs will face liquidity challenges if they do not get a moratorium on servicing their own bank loans and are forced to meet all debt obligations on time.”
The agency observed that realistically, NBFCs expect some funds to come in through collections, but the amount would vary based on asset class. However, it is important to note that even when the lockdown ends, collections are unlikely to return to normal levels immediately and will improve only gradually. Borrower behaviour regarding payment discipline after the moratorium will be a key monitorable.
CRISIL said it understands that NBFCs are seeking both clarity from the RBI on applicability of moratorium and access to a formal liquidity window which may provide some structural liquidity support to NBFCs similar to that available for banks.
The agency observed that it is closely scrutinising the impact of these developments on the credit profiles of NBFCs and will take appropriate rating action where required.