Banks offer no relief, NBFC might be unable to service ballooning debt of Rs 1.75 lakh crore

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Published: April 11, 2020 1:23 PM

While non-banking finance companies have provided their customers with a three-month moratorium, a similar relief has not been extended towards them by banks.

The move is expected to put severe liquidity stress on NBFCs with almost Rs 1.75 lakh crore debt obligations maturing by June.

While non-banking finance companies (NBFC) have provided their customers with a three-month moratorium, a similar relief has not been extended towards them by banks. The move is expected to put severe liquidity stress on NBFCs with almost Rs 1.75 lakh crore debt obligations maturing by June this year, said a report by rating agency Crisil. Collections for NBFCs are expected to dip significantly owing to the nationwide lockdown and the moratorium, despite this, banks are not looking to extend the moratorium relief towards the NBFCs that are already under stress and facing liquidity issues.

NBFCs unlike banks do not have access to systematic sources of liquidity and depend on wholesale funds, rating agency Crisil said in the report. Although the central bank, through its targeted Long-Term Repo Operations (LTRO) window has made available Rs 1 lakh crore, the same is expected to be crowded by corporates and government-owned financiers, pushing out smaller NBFCs. “Given the challenges in access to fresh funding, and presuming nil collections, CRISIL’s study underscores that a number of NBFCs will face liquidity challenges if they do not get a moratorium on servicing their own bank loans and are forced to meet all debt obligations on time,” said Krishnan Sitaraman, Senior Director, Crisil Ratings. 

If the moratorium is not extended towards NBFCs by lenders, Crisil estimates that only 37% of the NBFCs it rates will have liquidity cover of more than three times their total debt repayment at the end of May 2020. On the other hand, 11% of the NBFCs will have liquidity cover for less than 1 time, making them unable to service debt during a time when collections have not stopped but tanked severely.

It is not just Crisil that thinks the NBFCs are at a difficult juncture, Acuite Ratings and Research too hold similar views. “With collections coming to a standstill both due to the social isolation norms and the moratorium announcement, the primary cash flows of the NBFCs have been completely disrupted. While we can presume that most banks will provide back to back moratorium, there is no indication that it will be applicable for the non-bank lenders or investors unless there are specific bilateral arrangements,” said Acuite in a recently published report.

Apart from the immediate liquidity challenges NBFCs will also have to brace themselves for troubled times post the moratorium period as well. “ While the Covid lockdown may be gradually removed over the next few weeks, the impact on the businesses of the self-employed and SME borrowers is likely to be severe. Hence, we expect the collections to be severely impacted over the next 6 months with the 3-month moratorium only providing temporary relief,” the report by Acuite Ratings said.

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