Financials trade weak; Shriram Transport slips 18% on Fitch downgrade

Bajaj Finance, Bandhan Bank, HDFC, Manappuram Finance, Cholamandalam Financial and M&M Financial Services were down more than 10% on the BSE.

Shares of financials plunged up to 18 per cent on the BSE in the intra-day trade on Monday after the rating agency Fitch downgraded three Indian non-banking financial institutions (NBFIs). 

Fitch Ratings has downgraded the long-term issuer default ratings (IDRs) of Shriram Transport Finance Company (STFC) and Muthoot Finance (MFL) to 'BB' from 'BB+'. It has also downgraded the long-term IDR of India Infoline Finance (IIFL) to 'B+' from 'BB-'. All their ratings have been placed on Rating Watch Negative (RWN). Fitch has also placed the 'BB-' Long-Term IDR of Manappuram Finance on RWN.

STFC, Bajaj Finance, Bandhan Bank, Housing Development Finance Corporation (HDFC), Manappuram Finance, Cholamandalam Financial Holdings and Mahindra & Mahindra Financial Services were down more than 10 per cent on the BSE.

Ujjivan Financial Services, Federal Bank, HDFC Bank, ICICI Bank, City Union Bank, Shriram City Union Finance, RBL Bank, IDFC First Bank and Cholamandalam Investment and Finance Company were down in the range of 5 per cent to 10 per cent.

Fitch Ratings said the rating actions reflect increasing macro-economic challenges for the Indian NBFI sector. These include the growing effects from measures to contain the COVID-19 pandemic, which will compound the tightening in funding conditions for NBFIs in recent weeks.

The RBI's recent liquidity and regulatory support measures should help to improve the funding environment in the near term, but it also underlines the severity of the situation and Fitch sees continued uncertainty in the coming months nonetheless.

Fitch also expects the constraints on business activity to lead to operational disruptions that will directly affect asset quality.

This comes on top of existing weak asset quality across NBFIs, and under-capitalisation in the banking system, which are likely to continue to hamper the growth and funding of the NBFI sector.

Fitch recently revised down India's GDP growth forecast for the fiscal year ending March 2021 (FY21) to 5.1 per cent, from 5.6 per cent previously, and the risks are skewed to the downside as the authorities attempt to contain the virus.

Among the individual stocks, shares of STFC slipped 18 per cent to Rs 596 on the BSE on Monday. Fitch Ratings said the downgrade and RWN on STFC's ratings largely stems from the deterioration in the operating environment for India NBFIs. STFC's portfolio will face increased asset-quality risks as the commercial vehicle portfolio is more exposed to business activity in India that will be hampered by the measures taken to tackle the coronavirus, it added,

Fitch expects delays in loan collections and asset recoveries if current restrictions on business activity are prolonged. This would place pressure on near-term on asset quality, credit costs and profitability.