NBFCs more vulnerable to Coronavirus than banks: Moody’s

Moody's

Disruptions caused due to Covid-19 pandemic will further worsen the asset quality of non-bank financiers, a segment which is more exposed to the recession than banks, Moody’s Investors Service said on Tuesday.

Moody's

“Asset quality at non-banking financial companies (NBFCs) will significantly deteriorate as economic disruptions from the coronavirus outbreak deepen an economic slowdown that has been underway in the past few years,” Moody’s said in a report.

The asset quality of these lenders has declined in recent years amid deterioration economic conditions, which will be worsened by the economic shock from the coronavirus outbreak, it said.

Besides, the weakening solvency will, in turn, bring risks to the stability of the broader financial system, given the noteworthy exposure of banks to non-bank financiers, says Moody’s.

“We expect a significant weakening in asset quality at NFBCs, which will worsen the liquidity stress triggered by the three-month moratorium on customer loan repayments,” said Srikanth Vadlamani, vice-president and senior credit officer, Moody’s.

Indian banks have lent ₹8.07 trillion to non-bank financiers as on 27 March, up 26% from the same period last year, according to data from the Reserve Bank of India (RBI).

NBFCs, more than banks, are more exposed to the coronavirus-led slowdown, given their focus on riskier segments, specifically corporates and the real estate sector, which were facing liquidity constraints even before the outbreak, said the rating agency.

 “To alleviate borrower stress, RBI is allowing financial institutions to provide three-month moratoriums on loan repayments. These measures represent a significant drain on near-term liquidity at NBFCs, as most primarily manage liquidity by matching cash inflows from loan repayments with cash outflows to repay their own liabilities,” the report said.

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