Non banking financial institutions will continue to face elevated near term risks: Fitch Ratings

India's non-bank financial institutions (NBFIs) will continue to face elevated near-term risks, even as economic activity picks up with the easing of the country's nationwide lockdown, Fitch Ratings said.

Accordingly, the rating agency said that these risks 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.

“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,” Fitch Ratings said in a statement.

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

According to the ratings agency, the moratorium impact is varied across the different NBFI business models.

“We believe 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; we expect India's economy to contract by 5 per cent in the financial year ending March 2021 (FY21),” the statement said.

“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.”

As per the statement, 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.

“We expect credit costs to be elevated over the medium-term,” the statement said.

The rating agency had earlier revised India's outlook to negative from stable and affirmed the sovereign rating at 'BBB-'.

“The coronavirus pandemic has significantly weakened India's growth outlook for this year and exposed the challenges associated with a high public-debt burden,” it said..