Debt raising brings respite but financial condition is still fragile, say economists

There has been a spurt in bond and commercial paper issuances by private entities, especially non-banking financial companies (NBFC), and they are doing this at a cheaper rate than the pre-covid levels.

At the same time, taking advantage of low rates overseas and relatively relaxed norms by the Reserve Bank of India (RBI), Indian companies are lining up to raise resources abroad.

While some suggest that this could indicate financial stability taking hold in the system, others are not so optimistic even though they agree that there has been some respite concerning the NBFC sector.

In his Ecowrap report, State Bank of India (SBI) group chief economic advisor Soumya Kanti Ghosh said there was a clear indication that the “RBI policy of constrained discretion in monetary policy making has yielded rich dividends.” The rate transmission by banks has been the fastest in history, with banks cutting rates on an average by 72 basis points on fresh rupee loans in four months. In the first four months of the current fiscal year, CP issuances by the NBFC sector have been ~98,741 crore, with the cost of borrowing declining by a sharp 140 basis points. “Contrary to popular narratives, several small mutual funds (MFS) with much lower rating (A3+ with an equivalent long-term rating at BBB) are also participating in the CP market. The spread between NBFCS and G -secs with equivalent tenure has also softened, on an average, by 30-35 basis points since the beginning of the current fiscal year, and most importantly, mutual fund investment has incrementally gone up by ~10,000 crore,” Ghosh wrote.

The rates have come down sharply because the RBI has lowered policy repo rate by 115 basis points since March, while responding to the Covid-19 crisis. The central bank was already in a rate cutting spree, and has lowered the policy rate by 250 basis points since February 2019. All eyes are now on Thursday’s monetary policy announcement. Whether the central bank would extend the moratorium, or allow a onetime restructuring of loans will be keenly awaited.

Economists fear that the relative stability seen could be elusive, as the economy contracts and moratorium on repayment continues. Some also fear that the money raising spree is to hide losses.

“What if the money being raised is used for loss financing, and thereby, not using liquidity for real demand creation. If that is the case, we are potentially heading towards an even bigger crisis,” said Prabal Banerjee, group finance director at the Bajaj group.

“In my opinion, the RBI must extend the moratorium till at least March 2021. If not, there will be a huge accumulation of non-performing assets (NPAS) by end-march 2021 in bank books and cleaning up those won’t be easy,” Banerjee said. He added, if banks are saddled with uncontrollable NPAS, then market capitalisation will be severely impacted. The capital market will be in negative and the government has to again recapitalise banks, which is entirely avoidable.

According to Gaurav Kapur, chief economist at Indusind Bank, the financial stability pressure for the NBFC sector, especially related to market access and liquidity, has subsided compared to last year, However, the spread on government securities yield for NBFC papers remains high due to credit risk aversion. This is true particularly for ratings below AA.

“Asset-liability mismatch issues have been tackled, though market differentiation between better-rated NBFCS and others remains. The bigger issue on financial stability front, going ahead, would be asset quality deterioration, post lockdowns,” Kapur said.

Markets have certainly improved, “but the economy is still looking in a very difficult place. The state of banks and the financial sector is still very poor,” said Ananth Narayan, associate professor at SP Jain Institute of Management Research (SPJIMR).

While there is a semblance of financial stability, “a clearer picture will emerge after the moratorium ends,” said Sameer Narang, chief economist at Bank of Baroda.

A large number of financial institutions have or are in the process of raising equity capital. The enhanced equity capital will act as a buffer against an anticipated increase in nonperforming loans, Narang said. RBI’S baseline assessment projects gross NPA ratio of banks to increase to 12.5 per cent in March 2021 from 8.5 per cent in March 2020, “An extension of moratorium or a restructuring for certain sectors, impacted by the pandemic, will give borrowers room to pay back the loans as per a new schedule.”