NBFCs to face fresh challenges due to Covid surge: Analysts

Meanwhile, the extension of the Emergency Credit Line Guarantee Scheme (ECLGS) for SMEs till June 2021 will offer such borrowers further breathing space.

India’s non-banking financial companies (NBFCs) face renewed asset quality and liquidity risks as the country battles a fresh surge in coronavirus infections, analysts said. There could be a fall in securitisation volumes, as was seen in H1FY21, affecting non-bank lenders adversely.

The economic impact of various restrictions imposed by states will depend on their duration and severity. Expanded curbs could derail the fragile recovery in India’s NBFC sector since a nationwide lockdown was gradually relaxed from mid-2020, rating agency Fitch said on Thursday.

“SMEs (small and medium enterprises), commercial vehicle operators, microfinance and other wholesale borrowers remain at greater risk of stress in this environment, particularly as financial buffers would have narrowed after the severe economic shock over the past year. Production and supply chains remain susceptible to labour shortages if the large-scale urban-to-rural labour migration in 2020 recurs,” Fitch said in a note.

At the same time, regulators appear keenly aware of the credit and liquidity implications of any broad, extended movement curbs, while NBFCs’ day-to-day operations are also likely to be able to continue under the latest rules.

A resurgence in asset-quality pressure for NBFcs could lead to renewed funding strains for the sector, particularly as many government schemes that provided funding relief to NBFCs in 2020 have expired. These include the partial credit guarantee scheme supporting asset-backed securitisation and special liquidity scheme providing government-guaranteed short-term funding relief. Meanwhile, the extension of the Emergency Credit Line Guarantee Scheme (ECLGS) for SMEs till June 2021 will offer such borrowers further breathing space.

Icra Ratings said that due to the Covid-19 pandemic and resultant nationwide lockdowns, securitisation volumes had seen an unprecedented fall in H1FY21 after two successive years of healthy volumes close to Rs 2 lakh crore each. As economic activity gradually resumed and loan disbursements gained momentum, even reaching pre-Covid levels for some NBFCs, the securitisation market saw a healthy uptick in volumes during H2FY21. As per the rating agency’s estimates, the securitisation volumes for FY21 were at about Rs 85,000–90,000 crore, of which volumes in Q4 contributed nearly 45%.

Abhishek Dafria, vice-president and head – structured finance ratings, Icra, said that the rising Covid cases may again create uncertainty among investors. While the lockdowns announced so far are less restrictive in comparison to the nationwide lockdown seen last year, an unabated increase in Covid cases is likely to bring about fears of harsher lockdowns which could impact the asset quality of retail loans. “This in turn would impact the fundraising ability of the NBFCs and HFCs through securitisation of their assets. Successful implementation of the vaccination programme and ability of government agencies to arrest the rising infections would remain critical in the near term,” Dafria said.

Among its rated issuers, Fitch views IIFL Finance as the most vulnerable to recent developments due to its exposure to affected states and to higher-risk developers, SMEs and microfinance. Shriram Transport Finance Company is also relatively exposed because of its concentration in commercial vehicle finance, although essential-goods volumes could provide an offset in affected areas.