Covid-19 resurgence may derail recovery in Indian NBFC sector: Agencies

Face renewed asset quality, liquidity risks amid second wave; challenges likely to increase if recent curbs to contain pandemic are prolonged

Rating agencies Icra, Fitch and its domestic affiliate India Ratings (Ind-Ra), said today that the recent spike in Covid-19 cases and associated lockdowns, though localised, could adversely impact non-banking companies (NBFCs). It could also act as a dampener for the securitisation market, affecting fund-raising for NBFCs in the near term and may delay recovery in the sector.

India's non-bank financial institutions (NBFI) face renewed asset quality and liquidity risks amid a second wave of coronavirus infections. This may postpone the recovery in the sector, according to Fitch Ratings.

The challenges are likely to increase if recent restrictions to contain the pandemic are expanded or prolonged, leading to greater economic and operational disruption. Expanded curbs could derail the fragile recovery in India's NBFC sector.

Ind-Ra said spike in cases and curbs could disrupt supply chains, foreign portfolio investments and domestic credit markets. Various states in the country have taken steps including curbs like curfews and weekday activity restrictions till end of April 2021 with hope to contain spread. The economic impact of these curbs will depend on their duration and severity.

Amid a cautious financial system, the condition was improving, allowing low rated issuers to access capital though at a significantly high cost. Some of these gains could reverse and risk aversion could increase.

India Ratings said a conducive financing option is necessary, and volatile capital market condition impinges on such propositions. However, the enormous banking system liquidity and proactiveness from the Reserve Bank of India will alleviate the risk of a market failure.

Regulators appear keenly aware of the credit and liquidity implications of any broad, extended movement curbs.

Icra said NBFCs and housing finance companies (HFCs) securitised loans worth Rs 40,000 crore in Q4 FY2021, similar to volumes seen in Q4 FY2020. The securitisation volumes for FY2021 were Rs 85,000–90,000 crore, of which volumes in Q4 itself contributed nearly 45 per cent. The annual securitisation volumes may increase by 40-50 per cent in FY22 compared to FY2021.

The rising Covid-19 cases may again create uncertainty among the investors.  An unabated increase in the Covid cases is likely to bring about fears of harsher lockdowns. It could impact the asset quality of retail loans especially for unsecured loans such as in the microfinance sector. This in turn would impact the fund-raising ability of the NBFCs and HFCs through securitisation of their assets, said Abhishek Dafria, Vice President and Head-Structured Finance Ratings, at Icra.