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'Liquidity, asset quality risks for NBFIs remain elevated'
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SME Times News Bureau | 02 Jul, 2020
Rating agency Fitch Ratings on
Thursday said that India's non-bank financial institutions will continue
to face elevated near-term risks, even as economic activity picks up
with the easing of the country's nationwide lockdown.
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 Fitch Ratings, 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.
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