Indian NBFI Funding, Liquidity Risk Yet To Ease; Support Measures Hinge on Execution: Fitch
Indian non-bank financial institutions' (NBFI) funding and liquidity will continue to face pressure despite a pick-up in loan collections. While gradual easing of the coronavirus pandemic-related shutdown should strengthen loan receipts, any improvement should be viewed in relation to the depressed levels in April 2020, says Fitch Ratings, adding, it expects near-term collections to fall well short of pre-pandemic repayment schedules.
Elaine Koh, director for NBFIs at Fitch Ratings, says, “The success of India’s latest pandemic-related support measures for NBFIs will hinge on effective execution and lower risk aversion by banks, but risk to NBFIs’ asset quality and liquidity will linger.”
In a report, the ratings agency says, additional support initiatives announced by the Indian government last week could help to address some earlier policy gaps, but successful implementation will be key and India has a mixed record on this front. "Furthermore, we expect collections for the next few months to continue to fall well short of pre-coronavirus repayment schedules even though NBFI loan receipts should improve from April's depressed levels as coronavirus-related curbs are gradually eased," it says.
The government's latest measures seek to ease borrower strain and boost funding conditions for NBFIs. A fully guaranteed Rs3 trillion (about $40 billion) loan scheme for micro, small and medium enterprises (MSMEs) aims to encourage lenders to continue funding these more-vulnerable entities, while a modest NBFI debt guarantee plan could help smaller but creditworthy non-bank lenders.
Earlier liquidity support measures announced by the Reserve Bank of India (RBI) since late March 2020 have been less effective at relieving the sector’s funding and liquidity pressure. A Rs1 trillion (about $13 billion) bond purchase liquidity facility found its way mainly to top-tier corporate issuers and a handful of better supported NBFIs. Subsequently, a second facility earmarked for NBFI debt was poorly subscribed; only 51% of an initial Rs250 billion tranche (about $3.3 billion) was taken up.
Fitch says, "The measures largely relied on the banks as funding conduits, but without offering credit or capital protection against exposures taken on. These plans stumbled as banks remained wary of adding credit exposure to already weak balance sheets amid ongoing uncertainty. Instead, banks’ excess liquidity balances in the RBI’s reverse repo facility ballooned, highlighting the risk-averse nature of the broader banking system."
According to the ratings agency, the success of these schemes will rest on implementation details that are yet to be released as well as lowering the risk aversion among banks as they are the key intermediaries in the sector.
The government guarantee schemes for NBFIs announced on 13 May 2020 may help address banks’ risk aversion towards the sector. However, Fitch says, the structure that offers the strongest protection – the fully guaranteed liquidity scheme on investment-grade NBFI paper– only represents around 1% of outstanding NBFI debt.
"We expect the scheme to benefit small and mid-tier NBFIs in attracting funding due to the full credit risk mitigation – but access is likely to be rationed given the facility’s modest size," it added.
As per the ratings agency, pandemic-related liquidity support measures to date have had limited success in improving funding conditions for the NBFI sector. Local-currency corporate bond spreads have continued to climb despite various attempts to boost credit transmission since early March. Local NBFI bond spreads have been more affected and remained elevated even after the recent announcements. Easing spreads along with increased issuance will be key signals of improved appetite for NBFI debt, Fitch says.
The ratings agency feels that the downside risk for NBFIs’ asset quality and liquidity persists, even as the economy restarts. It says, "The economy has suffered significant damage and we expect a lagged recovery. Acceleration in coronavirus cases could impede process and banks – the major source of NBFI funding – are still wary of looming asset-quality pressure."
"We believe NBFIs will continue to face considerable risks to their asset quality and liquidity even as the economy reopens gradually. The number of new COVID-19 cases continues to rise and a significant acceleration could set the process back. Meanwhile, Indian banks - the major source of incremental NBFI funding - remain cautious in the face of looming asset quality pressure," Fitch says.
According to the ratings agency, funding access and liquidity continue to be pressing for the NBFI sector as a whole. This is because, it says, like banks, NBFI borrowers are eligible for a three-month principal repayment holiday under the RBI’s moratorium scheme, but unlike banks, NBFIs are mostly wholesale-funded – with regular debt repayments coming due but without access to a lender of last resort.
“NBFIs’ borrowers also tend to be lower-income and less financially secure, and are hence more likely to require debt relief. Steady access to funds is therefore crucial for NBFIs to meet their obligations while loan collections are hampered by shutdowns and repayment holidays. Some NBFIs may need to draw on existing liquidity resources to meet repayments – though sluggish loan demand should help them conserve cash,” Fitch added.
In late March, Fitch took negative action on its rated Indian NBFI portfolio to reflect the sector's vulnerability to a coronavirus-related downturn. Since then, it says, loan collections have taken a hit amid the extended economic shutdown.
Fitch-rated NBFIs have retained sufficient funding access consistent with their rating levels over the period, and recent developments are net positive for the sector. "However, conditions remain fragile, and Fitch will continue to monitor underlying developments closely as we look to address the negative watches on our Indian NBFI ratings over the coming months," the ratings agency concludes.