Rating agencies flag off NBFC asset quality concerns

Non-performing assets (NPAs) of NBFCs could touch 7.0-9.5% by March 2021, Icra said.

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While the moratorium is likely to give them the much-needed breathing space; the asset quality performance of the non-banks is likely to impact their performance.
Mumbai: Rating agencies are increasingly flagging off asset quality concerns for NBFCs - After Icra, now Fitch Ratings has raised an alarm.

Non-performing assets (NPAs) of NBFCs could touch 7.0-9.5% by March 2021, Icra said. Global Ratings firm Fitch Ratings expects that the moratorium will erode payment discipline and its extension will result in lagged asset-quality problems for NBFIs, particularly when combined with the economic damage from the pandemic and lockdown.

While the moratorium is likely to give them the much-needed breathing space; the asset quality performance of the non-banks is likely to impact their performance. Assuming a slippage of 5-10% of the asset under management (AUM) under moratorium, Non- bank NPAs could increase to 5.0-7.0% by March 2021 from about 3.3-3.4% in March 2020, Icra said in a release.


The risks for NBFCs revolve around liquidity and asset quality in particular and reflect the impact of the coronavirus pandemic on borrowers' repayment capabilities, as well as the effects of the moratorium on collections, according to Fitch Ratings. Significantly, Fitch released its assessments on July -2, after the Reserve Bank announced the eligibility conditions for special liquiidity facility for NBFCs to meet COVID-19 related shortfalls on Wedneday July, 01.

The cash flow implications of the moratorium, which regulators have extended to end-August, have not been uniform across the industry, affecting some NBFIs liquidity profiles more materially and placing pressure on their ability to repay or refinance upcoming obligations, say rating agencies. "We expect near-term inflows to remain below pre-pandemic levels and to improve only gradually as economic activity gathers pace" Fitch said.

Icra expects funding constraints to remain in the near to medium term and large, better rated and entities with strong parentage or group support may be better of in getting funds. "While the CP rates have moderated substantially, the issuance volumes have remained low and are going to a select set of entities. External commercial borrowings which supported the funding during FY2020 is also expected to remain muted" Icra said.
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