S&P revises outlook for Shriram Transport Finance, four other NBFCs to negative

International rating agency S&P Global Ratings on Friday lowered the rating on Shriram Transport Finance Company (STFC) to BB from BB+ and revised its and four other NBFCs' outlook to negative.

The rating agency has revised the outlook on Bajaj Finance (BFL), Manappuram Finance, Muthoot Finance and Power Finance Corpration (PFC) to negative but affirmed their ratings.

"Indian NBFCs face increasing risks from challenging operating conditions stemming from the COVID-19 outbreak, the rating agency said in a note.

The rating agency lowered the ratings on STFC owing to tight funding environment for the company amid challenging operating conditions and weakness in asset quality.

"The used commercial vehicle segment is vulnerable in the current slowdown. The company's borrower profile is less resilient to the lockdown and weak economic activity. Also, collections will be more difficult for the company as it has a high reliance on collecting cash repayments, it said.

The rating agency said the negative outlook on BFL reflects its view that there is a one-in-three chance that it will lower the rating over the next 12 months due to rising economic risks in the country's financial sector.

The negative outlook on Manappuram, Muthoot and PFC reflects the rating agency's view that the companies are not immune to heightened economic risks affecting the country's financial system over the next 12-18 months.

The rating agency further said it expects the overall impact on the NBFC sector to be more pronounced than on the banking sector, given some of them lend to "weaker" customers.

Also, NBFCs were already reeling under trust deficit in the system since the default of Infrastructure Leasing & Financial Services, the agency said.

It said the deterioration in NBFCs' asset quality may intensify as the economy slows amid the coronavirus outbreak.

"We expect the microfinance segment to be the most affected during the lockdown as it relies primarily on cash collections and its borrowers, many with weak credit profiles, would have faced disruptions to income generation," the report said.

It said the three-month moratorium on principal and interest repayments allowed by the RBI will help borrowers with temporary liquidity problems but it will also result in delayed recognition of weaker loans.

The report said there could be more differentiation in the liquidity available to finance companies, with strong NBFCs benefitting from a flight to quality.

Liquidity stress could be high for wholesale lenders with large exposure to property developers or those without a strong parent, or companies with perceived weak governance, it added.