According to Fitch Ratings, non-banking finance firms are facing fresh asset quality and liquidity challenges as a result of the second phase of COVID-19.
According to Fitch Ratings, non-banking finance firms are facing fresh asset quality and liquidity challenges as a result of the second phase of COVID-19. These difficulties are likely to worsen if recent pandemic-containment constraints are increased or extended, causing further economic and organisational instability, according to the study.
According to the rating firm, a spike in the incidence of diseases and the expansion of social distancing limits raise downside threats to the current fiscal’s 12.8 percent development forecast.
Fitch Ratings said in a statement that “India’s non-bank financial institutions (NBFI) face revived asset quality and liquidity challenges amid a second wave of coronavirus infections.”
Maharashtra, the state with the highest economic contribution in India, accounting for 13-14 percent of the national GDP, is a central COVID hotspot, according to the study.
Additional limits, such as night curfews, have been imposed in many other states, including Gujarat, Punjab, Delhi, and Chhattisgarh, which together account for around 16% of national GDP.
“The economic effect of these restrictions can be determined by the length and severity of the restrictions. Since a nationwide lockdown was progressively eased from mid-2020, expanded curbs could derail India’s NBFI sector’s fragile recovery,” Fitch added.
In this climate, SMEs, commercial vehicle operators, microfinance, and other wholesale borrowers are at greater risk of stress, particularly because financial reserves have narrowed following the extreme economic shock of the previous year. If large-scale urban-to-rural labour movement occurs again, production and supply chains would be vulnerable to labour shortages.
“Against this, we think policymakers have acquired expertise over the past year in negotiating the trade-off between tougher controls and sustaining economic activity,” Fitch said.
A resurgence in asset-quality pressure for NBFIs, it said, could lead to renewed funding pressures for the sector, particularly because many government schemes that provided funding relief to NBFIs in 2020 have now expired. The Partial Credit Guarantee programme, which supports asset-backed securitization, and the Special Liquidity Scheme, which offers government-guaranteed short-term financing aid, are two examples.
Meanwhile, the Emergency Credit Line Guarantee Scheme for SMEs has been extended until June 2021, giving creditors some breathing space.
If more stringent constraints with greater operating implications for graded organisations are implemented, Fitch will review NBFI scores.