NBFIs to face liquidity, asset quality risks: Fitch

Even as India's economic activity slowly picks pace post easing of lockdown, the country's non-banking financial institutions face elevated near-term risks because of liquidity squeeze and asset quality woes, Fitch Ratings said in a note.

The global rating agency said loan moratorium extended by non-bank lenders will hit their collections leading to a liquidity squeeze, while asset quality will be impacted due to COVID-19 impact on borrowers' repayment capability.

However, the loan moratorium's impact on liquidity of non-bank lenders hasn't been uniform, with some getting hit harder.

Fitch expects the nearterm inflows of non-bank lenders to remain below pre COVID-19 levels, and to improve only gradually as economic activity gathers pace.

Among non-banking finance companies rated by Fitch, collections of IIFL Finance and Shriram Transport Housing Finance have been hit harder because of loan moratorium, while for gold financiers like Muthoot Finance and Manappuram Finance, the impact has been lesser.

Further, Fitch said that loan moratorium will "erode payment discipline", and its extension for another three months will only delay asset quality problems for non-banking financial institutions.

"Asset quality indicators did not show significant deterioration in FY20 (201920), but regulatory guidance around impaired-asset recognition indicates that the true extent of the damage may only become visible in FY22 (2021-22).

This lack of transparency will complicate the sector's fund raising efforts," Fitch said. While some lenders proactively did make higher provisions during JanMar on account of COVID19, "whether this was sufficient" will depend on future asset quality trends.

Fitch, however, believes the medium-term credit cost, or the capital kept aside for bad loans, will remain elevated for nonbanking financial institutions.

Lastly, Fitch said it maintains a 'rating watch negative' on four of its rated non-bank lenders, and would look at greater certainty around near-term liquidity and refinancing risks and economic activity, before changing these ratings.