Continued liquidity stress may have deeper impact on NBFCs

Non-bank financial companies (NBFCs) are likely to be impacted significantly if the liquidity situation, triggered by IL&FS default, continues to remain tight, according to a report.

Infrastructure Leasing & Financial Services (IL&FS) and its subsidiaries are facing liquidity crisis and has defaulted on debt repayment. The default by IL&FS has also impacted other NBFCs and also mutual fund players.

"Non-bank financial institutions (NBFI) will be significantly impacted if the liquidity distress in the country's capital markets, triggered by the default in September 2018 of IL&FS, prolongs for an extended period of time," rating agency Moody's said in a report.


The rating agency's vice president and senior credit officer, Srikanth Vadlamani, said the authorities will continue to take measures to limit the scope and duration of the prevailing liquidity challenges, while most NBFIs can cope with multi-weeks of tight liquidity conditions.

"However, prolonged liquidity distress will significantly erode the NBFIs' credit standing, and prove negative for the broader economy and structured finance sector," he said.

The report said liquidity tightness could lead to sharply higher financing costs for NBFIs, or even difficulty in rolling over their liabilities, because these companies have relied heavily on market borrowing to fund asset growth.

Any effects on the NBFIs 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 per cent versus banking system loans/GDP of 52 per cent.

"Consequently, a slowdown in credit growth provided by NBFIs will dampen overall consumption and economic growth," it said.

The report said NBFIs' liquidity management practices suggests that these companies are capable of coping with multi-week liquidity distress, but a prolonged period of liquidity stress will severely weaken the NBFIs' credit standings.

There will not be a significant impact on the credit quality of the country's structured finance sector, nor performance of asset-backed securities (ABS), it said.