IL&FS liquidity crunch could deeply hurt not only NBFCs, but also broader economy: Moody’s

By: | Updated: October 15, 2018 3:08 PM

Since NBFIs primarily depend on markets for borrowing to finance asset growth, the continued liquidity crunch would lead to increased financing costs for NBFCs or even 'difficulty in rolling over their liabilities’, it added.

money, travel, travel plansTight liquidity situations, if prolonged for an extended period of time, may also prove negative for the broader economy.

Moody’s Investors Service has raised concerns over the current liquidity situation in the capital markets, which was triggered following the debt defaults by IL&FS in September this year. In a note released on Monday, the rating agency said that continued liquidity stress for an extended period of time will have a deep impact on Indian non-banking finance companies (NBFCs) and erode their credit profiles significantly.

It also added that the ongoing liquidity crunch may also prove negative for the broader economy. “Any effects on the NBFIs (non-banking finance institutions) will spill over to the broader economy — mainly through the credit channel — because NBFIs are a material provider of credit for the economy, with outstanding loans/GDP at end March 2018 registering 13% versus banking system loans/GDP of 52%,” the report showed.

IL&FS, once a blue-chip infrastructure, and its subsidiaries have recently defaulted on several short-term debt repayments. The defaults by IL&FS have triggered a liquidity crunch in the markets and made it difficult for small lenders to do normal business ahead of the festive season as both public sector banks as well private sector banks have stopped lending to NBFCs and housing finance companies (HFCs). IL&FS currently has a debt of over Rs 90,000 crore.

ALSO READ: IL&FS debt crisis: FinMin, NBFCs work on ways to ease liquidity crunch, but RBI norms may play spoilsport

Srikanth Vadlamani, vice president and senior credit officer of the rating agency, said that the authorities will take actions to limit the duration and scope of the current liquidity challenges, and NBFCs can cope with the multi-weeks of tight liquidity situations. However, he also added that the liquidity stress for a longer time may prove negative for the broader economy as well as for the entire structured finance sector.

Since these small lenders primarily depend on markets for borrowing to finance asset growth, the continued liquidity crunch would lead to increased financing costs for NBFCs or even ‘difficulty in rolling over their liabilities’, the report added.

There, however, will not be any significant impact on the credit quality of the structured finance sector in the country or on the performance of the asset-backed securities. On the other side, another rating agency Fitch said last week that the recent debt defaults by IL&FS have brought to the fore the continuity risks of India’s asset-backed security issuers.

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