Liquidity cover for NBFCs not much affected in April and May: Report

The liquidity cover for non-banking financial companies (NBFCs) has not been affected much in April and May, as they managed partial collections and on lack of fresh disbursements, according to a report.

The parallel banking sector, however, continues to find challenges in fundraising due to risk-averse sentiment from investors amid the coronavirus pandemic, according to the report by rating agency Crisil.

"Despite cash outflow owing to debt repayments, a combination of partial collections, incremental funding, and negligible disbursements has supported the liquidity levels of NBFCs," Crisil Rating Senior Director Krishnan Sitaraman said in the report.

It had earlier estimated that the liquidity covers for its rated NBFCs could reduce in the event of weak incremental funding, collections and limited moratorium on their bank borrowings.

The rating agency said that in its base-case scenario, where collections in the next few months will be similar to April-May levels without any moratorium on liabilities, the proportion of NBFCs with liquidity cover of less than one time will be 8 per cent during the three months through August.

In a stress case, where collections are nil and there is no moratorium on liabilities, the proportion of companies with low liquidity could go up to 25 per cent, it said.

According to the agency, in an alternative case, where NBFCs get benefit of moratorium on their bank loans but there being no collections, the proportion of NBFCs with low liquidity cover is likely to be reduced to 5 per cent.

"June is crucial with nearly Rs 1.25 lakh crore of repayments, which is half of the around Rs 2.5 lakh crore due through August. However, if banks were to offer moratorium on them, the proportion of NBFCs with low liquidity cover reduces significantly to just 5 per cent from 25 per cent envisaged in our stress-case scenario," Sitaraman said.

In terms of incremental funding, capital market issuances have dropped substantially, with investments by mutual funds -- a key investor segment -- in NBFC debt plunging to the lowest level in more than two years, it said.

The securitisation route has also seen very few transactions consummating in the past few months due to concerns over asset quality and lack of granular track record of collection efficiency after the onset of the coronavirus pandemic, the rating agency said.

With a predominantly wholesale resource base and lack of access to systemic liquidity support, NBFCs are more vulnerable to liability-side stress compared with banks, and any stress in the sector can cascade into funding deficiencies in the segments they lend to, which can then morph into systemic issues.

"That is why support from banks for NBFCs will be all the more crucial in the context of stability of the financial system at large," the agency said.

One form of this support in the current context would be availability of bank loan moratorium for NBFCs that can substantially improve their liquidity covers, it said.