RBI Financial Stability Report | Moratorium impact on NBFCs, HFCs may be substantial

The impact of the moratorium on private non-banking finance companies (NBFCs) and housing finance companies (HFCs) can be substantial, with approximately 50 percent of the aggregate assets under moratorium as on end April 2020, the RBI said in its Financial Stability Report (FSR).

“Based on the disclosures made by NBFCs/ HFCs, the assets under moratorium are dominated by wholesale customers and real-estate developers, although retail portfolios in the micro-loans and auto loan segments have also been affected,” the central bank said.

Responding to Covid-19, the RBI announced loan moratorium for a period of six months beginning March to August. The idea was to help borrowers defer their EMIs for a few months until things improve. However, there is a concern among bankers and analysts that at least five percent of these loans could go bad if Covid-19 impact remains in the economy for a longer period.

Access of NBFCs/HFCs to capital markets, both debt and equity, is of significant importance to the sector. Given the uncertainty relating to cash flows induced by COVID-19, the short-term maturities of market liabilities of Non-PSU NBFCs/ HFCs become relevant, the RBI said.

Liquidity worries

Also, the declining share of market funding for NBFCs is a concern as it has the potential to accentuate liquidity risk for NBFCs as well as for the financial system, the RBI said. “Smaller / mid-sized and AA or lower-rated / unrated NBFCs have been shunned by both banks and markets, accentuating the liquidity tensions faced by NBFCs which was also reflected in the lacklustre response to the Targeted Long-Term Repo Operations 2.0 (TLTRO 2.0),” the RBI said.

The RBI launched TLTRO and TLTRO 2.0 to help NBFCs get liquidity support. However, the scheme benefited only top-rated, big NBFCs since banks remained risk-averse. NBFCs were also disappointed with the government’s Rs 30,000 crore special liquidity scheme on account of the short-tenure. The scheme gave only three months for NBFCs to repay the money.

NBFC industry faced a major trust deficit following the IL&FS and DHFL episodes in 2018. Banks shut funding channels and investors shunned these entities on account of high-risk perception. Over the last year, funding scenario has improved for NBFCs. However, smaller NBFCs continue to feel the fund shortage.

Stress tests

The RBI said the system-level stress tests for the NBFC sector’s aggregate credit risk for the quarter ending December 2019 were carried out under three scenarios: increase in GNPA by (i) 1 SD; (ii) 2 SD; and (iii) 3 SD. “It is assessed that the sector’s CRAR would decline from 19.4 per cent to 17.2 per cent in the first scenario, to 16.4 per cent in the second scenario and to 15.2 per cent in the third scenario,” the report said.