The recent second wave of coronavirus (COVID) cases will continue to exert near-term pressure on India's non-bank financial institutions (NBFI), says Fitch Ratings in a report, adding this is despite less stringent activity restrictions than in 2020, and cases of infection subsiding rapidly, leading to a gradual reopening of the economy since June.
"We expect NBFIs' upcoming earnings reports to highlight asset quality weakness and profitability pressure as the impact of recent economic shutdowns becomes clearer," the ratings agency says.
In its June 2021 Global Economic Outlook, Fitch revised India's gross domestic product (GDP) forecast for the fiscal year ending March 2022 (FY21-22) to 10% from 12.8% in the previous forecast in March 2021, reflecting lock-downs across much of India to contain the virus. It says, the recovery in the September quarter is likely to be gradual as states reopen cautiously to prevent a third wave of infections amid an uneven vaccination roll-out.
According to the ratings agency, infection spread in rural and semi-urban areas during April-May 2021 was as extensive as in large cities, unlike in 2020 when rural infections were low.
"This, along with persistent stress in urban markets, will lead to higher non-performing loans and impairment costs for NBFIs. The severity of the credit deterioration will depend on the strength of the economic recovery from here," it added.
Fitch says, "Liquidity profiles of large NBFIs' are likely to be supported by improved buffers and sufficient funding access, although prolonged asset quality challenges would constrict their funding. Meanwhile, smaller NBFIs, particularly microfinance and unsecured lenders with regional portfolios, could face greater funding strains."
Extended credit stress would compound pressure on NBFI credit profiles, "but we assess Fitch-rated issuers to have some headroom at their current rating levels," the ratings agency added.