Lockdown: Large retail-focused NBFCs facing cash flow difficulties; debt servicing a challenge

Nearly a dozen of large retail-focused non-banking finance companies (NBFCs) may need around Rs 10,000-20,000 crore of funds over the next few months for servicing their debt obligations and to run their operations, says a report.

Due to the ongoing lockdown, the primary cash flows of the NBFCs have been disrupted as their collections have come to a standstill, according to a report by Acuit Ratings & Research on top 11 retail NBFCs.

These NBFCs, which account for 43 per cent of the advances of the retail NBFC sector, would find it difficult to manage their cash flows unless they get access to additional bank lines or refinance, it said.

"The refinancing requirement for these 11 retail large NBFCs is at around Rs 10,000-20,000 crore to avoid any challenges in their debt servicing and to sustain their operations," its chief analytical officer Suman Chowdhury said in a report.

The aggregated debt repayment including interest for these retail NBFCs in the current quarter is estimated to be between Rs 40,000 crore to Rs 60,000 crore while their cash reserves are estimated to be around Rs 45,000 crore.

Last month, the Reserve Bank of India (RBI) had announced a three-month moratorium on repayment of term loans.

While most banks will provide back-to-back loan moratorium, there is no indication that it will be applicable for debt market instruments, it said.

Almost 60 per cent borrowing of 11 retail NBFCs are from non-bank sources and require continuity in debt servicing.

"With minimal collections, the NBFCs can only depend on their cash reserves and any backup credit lines from banks, if available for servicing such debt," the rating agency said.

It said beyond the immediate liquidity challenges, the key risk for these NBFCs is a sharp deterioration in the delinquency levels subsequent to the expiry of the three-month moratorium.

According to a vulnerability analysis done by the rating agency, retail NBFCs with leverage of 3x or more have a significant likelihood of incurring losses in FY21 if the stage 3 delinquencies or NPAs increase over 8 per cent.

"Those NBFCs with capital adequacy levels of 20 per cent and lower are likely to be more impacted as the buffer to absorb any losses will be lower vis--vis regulatory threshold, its head (financial sector ratings) Vinayak Nayak said.

The agency expects the disruption from complete or partial lockdown to subside completely by the second quarter of FY21.

However, if the lockdown is prolonged, it can impact the sustainability of a few NBFCs, it added.