NBFIs to face liquidity, asset quality risks in near term: Fitch

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Published: July 2, 2020 1:46 PM

The non-banking financial institutions will continue to face elevated liquidity and asset quality risks in the near term even as the economic activity picks up with easing of lockdown restrictions, Fitch Ratings said on Thursday.

NBFI, liquidity, asset quality risk, Fitch, lockdown restrictions, Fitch Ratings, RBI,Fitch estimates India’s economy to contract by 5 per cent in the financial year ending March 2021.

The non-banking financial institutions will continue to face elevated liquidity and asset quality risks in the near term even as the economic activity picks up with easing of lockdown restrictions, Fitch Ratings said on Thursday. These risks reflect the impact of the coronavirus pandemic on borrowers’ repayment capabilities, as well as the effects of the moratorium on collections, it said.

Fitch said cash flow implications of the moratorium, which the RBI has extended to end-August, have not been uniform across the industry, affecting liquidity profiles of some NBFIs more materially and placing pressure on their ability to repay or refinance upcoming obligations.

”We expect near-term inflows to remain below pre-pandemic levels and to improve only gradually as economic activity gathers pace,” it said.

Fitch said the moratorium will erode payment discipline and its extension will result in lagged asset-quality problems for non-banking financial institutions (NBFIs), particularly when combined with the economic damage from the pandemic and lockdown.

Fitch estimates India’s economy to contract by 5 per cent in the financial year ending March 2021. ”Asset quality indicators did not show significant deterioration in FY20, but regulatory guidance around impaired-asset recognition indicates that the true extent of the damage may only become visible in FY22. This lack of transparency will complicate the sector’s fund raising efforts,” Fitch said.

The FY20 results do reveal that many of the sector’s largest competitors took proactive provisioning, but whether this was sufficient will depend on the extent of asset-quality deterioration in the coming months. Fitch expects credit costs to be elevated over the medium-term.

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