India's non-bank financial institutions (NBFI) face renewed asset quality and liquidity risks amid a second wave of coronavirus infections, and these challenges are likely to increase if recent restrictions to contain the pandemic are expanded or prolonged, leading to greater economic and operational disruption, says Fitch Ratings.
According to the ratings agency, a resurgence in asset-quality pressure for NBFIs could lead to renewed funding strains for the sector, particularly as many government schemes that provided funding relief to NBFIs in 2020 have expired. These include the partial credit guarantee scheme supporting asset-backed securitisation and special liquidity scheme providing government-guaranteed short-term funding relief. Meanwhile, the extension of the emergency credit line guarantee scheme for SMEs till June 2021 will offer such borrowers further breathing room.
Fitch-rated NBFIs have pan-India operations that are often focused on rural geographies, which may be less affected by the recent measures. However, Fitch says it may review the ratings if more severe restrictions that have greater operational repercussions for rated entities are imposed.
"Of our rated issuers, we view IIFL Finance Ltd as the most vulnerable to recent developments due to its exposure to the affected states and to higher-risk developers, SMEs and microfinance. This risk is reflected in its rating at the lower-end of rated peers. Shriram Transport Finance Company Ltd is also relatively exposed because of its concentration in commercial vehicle finance, although essential-goods volumes could provide an offset in affected areas.
"The ratings on Muthoot Finance Ltd and Manappuram Finance Ltd reflect our belief that their niche gold-backed loan exposure will remain relatively resilient," the ratings agency says.
Fitch revised India's gross domestic product (GDP) forecast for the fiscal year ending March 2022 (FY21-22) to 12.8% in its March 2021 global economic outlook, from 11.0% in the previous forecast in December, due to the unexpectedly strong rebound in economic activity in late-2020 and early-2021.
It says, "The forecast revision incorporated expectations of a slowdown in 2Q21 due to the flare-up in new coronavirus cases. However, an increase in the rate of infections and broadening of social distancing restrictions pose downside risks to our projections."
A key hotspot is Maharashtra, the state with the largest economic contribution in India at 13%-14% of national GDP. Maharashtra introduced stricter social-distancing measures over the weekend in response to rising coronavirus cases, including weekend curfews and weekday activity restrictions till end-April 2021.
Several other states - Gujarat, Punjab, Delhi, and Chhattisgarh, which together account for about 16% of national GDP - have also implemented additional restrictions, including night curfews.
Fitch says, the economic impact of these curbs will depend on their duration and severity and expanded curbs could derail the fragile recovery in India's NBFI sector since a nation-wide lock-down was gradually relaxed from mid-2020.
According to the ratings agency, small and medium enterprises (SMEs), commercial vehicle operators, microfinance and other wholesale borrowers remain at greater risk of stress in this environment, particularly as financial buffers would have narrowed after the severe economic shock over the past year. Production and supply chains remain susceptible to labour shortages if the large-scale urban-to-rural labour migration in 2020 recurs, it says.
Against this, Fitch says it believes authorities have gained experience in balancing the trade-off between tighter restrictions and maintaining economic activity over the past year.
The national government and authorities in several states have indicated that fresh restrictions will not be as extensive as those in April-June 2020, particularly as vaccine rollout progresses.
"Consumers and businesses are also likely to better adapt their economic activity to the second wave of restrictions, as we have seen in other countries. Regulators appear keenly aware of the credit and liquidity implications of any broad, extended movement curbs, while NBFIs' day-to-day operations are also likely to be able to continue under the latest rules," Fitch says.