COVID-19 impact: NBFCs' pain to worsen further, securitisation market too may take hit, raters warn

Rating agencies have cautioned about the impending pain for non-banking finance companies (NBFCs) that may arise out of lack of funding and rising bad assets.

The NBFCs are likely to witness a spike in delinquencies across all asset classes, especially loans disbursed by microfinance institutions (MFIs), which could result in challenges in sell-down of their portfolio, said rating agency ICRA said in a release on Tuesday.

Subsequently, the Indian securitisation market is expected to remain tepid in H1 FY2021 due to the uncertainties emerging from the outbreak of COVID-19 pandemic and economic slowdown, ICRA said.

However, once the lockdown situation eases and the economy starts to gradually recover, the market is likely to recover; and securitisation would again emerge as an important source of funding for NBFCs and housing finance companies (HFC)s in the long run, ICRA said.

In another article, S&P Global market intelligence, a division of S&P, said NBFCs’ funding could remain tight. “Many Indian non-banking financial companies may remain short of funds as investors become more cautious and the economy contracts, adding risks to the broader financial system,” said the article.

Mutual funds' exposure to NBFCs has almost halved over the past 18 months, falling to 18 percent of debt assets under management in April 2020, from 34 percent in September 2018, the S&P article said, citing the Credit Suisse note dated May 26.

"Mutual funds have been aggressive in reducing exposure to perceived weaker NBFCs," Credit Suisse said, noting that they have almost completely pulled funding to such players in the last year-and-a-half.

The "long tail" of the previous corporate non-performing loans cycle over 2016-2019 had already led to a lending concentration around well-rated players. However, it has been further accentuated in the last 12 months with most large players in the segment giving more than 90 percent of their incremental credit to only the well-rated entities, the report said, quoting Credit Suisse.

“Adding strain on the non-bank lending sector that was already hit by a funding squeeze after a few high-profile defaults. Now, as the wheels of the world's fifth-biggest economy begin to turn again, analysts doubt whether the smaller and weaker NBFCs will still find favor,” said S&P Global market intelligence.

The government announced liquidity schemes worth Rs 75,000 crore for NBFCs which include Rs 30,000 liquidity scheme backed by government security. The remaining Rs 45,000 is through a partial credit guarantee scheme.

The Reserve Bank of India (RBI) had announced a few schemes to make liquidity available for NBFCs, including targeted long-term repo operations. The RBI also announced a temporary increase in group exposure limits to 30 percent from 25 percent to enable larger business groups to seek additional funding from the banking system.

In a separate note, rating agency CARE too warned that NBFC’s funding challenge will remain this year on account of COVID-19 impact on economic activities. This is because banks have become more selective in extending credit owing to the risk aversion, leading to tighter liquidity concerns, the rating agency said.

After the liquidity crisis triggered in the NBFC space, MFs withdrew over 40 percent of their investments from this category. The percentage share of funds deployed by MFs in commercial papers (CPs) of NBFCs in April fell to 3.3 percent of debt assets under management (AUMs, the lowest since September 2018 when it was 9.5 percent) and the amount held declined to just Rs 0.44 lakh crore. The decline in investments in corporate debt paper of NBFCs stood at Rs 0.9 lakh crore in April and was the lowest since September 2018, CARE said.