Non-banking finance companies (NBFCs), an integral component of the Indian lending ecosystem apart from banks, could see a major impact of COVID-19 on their liquidity position and asset quality in the financial year 2020-21.
Before the coronavirus outbreak, RBI and the government took several measures to support NBFCs since August 2019, especially after the IL&FS credit crisis created serious headwinds in September 2018.
Hence, with the improved liquidity conditions and solid business franchise, the entire NBFC space was looking to return to comfortable levels in the second half of FY20, but the novel coronavirus, or COVID-19, spread clipped the recovery.
As a result, there could be further disruption in the economy.
The 21-day lockdown triggered by the #Covid-19 pandemic will have near-term impact on collections and fresh loan disbursements of non-banking financial companies (NBFCs), cautioned credit rating agency CRISIL in its credit alert.
The agency assessed that the extent of this impact arising from the lockdown will depend on four factors ― asset class, income source of the customer, level of field work in operations, and proportion of cash collections.
Non-banking finance companies (#NBFCs) are on the edge with commercial paper worth ₹1.6 lakh crore and nonconvertible debentures (NCDs) worth ₹87,000 crore coming up for redemption by June as cash flows dwindle and banks play hardball on extending credit.
Small and medium-sized NBFCs are most at risk due to the disruption caused by the Covid-19 outbreak. Large lenders will be able to tap #RBI's Rs 1 lakh crore targeted longer term refinancing operations (#TLTRO) window but others are likely to face a crunch.
What can exacerbate the situation is that mutual funds ― a large investor base for higher-rated NBFCs ― are facing redemption pressure, and hence, are unlikely to roll over commercial paper (#CP) or reinvest in debentures immediately to any substantial extent, he added. However, any restructuring or re-scheduling permitted by the investors will help alleviate the pressure on repayments.
Moratorium Facility Non-bank lenders have appealed to the Reserve Bank of India to direct banks to extend the benefit of the three-month asset classification moratorium. The central bank has sought to cushion borrowers and lenders against the coronavirus outbreak effect, allowing companies a three-month grace period on loan repayments. Banks now have the discretion to decide limits on working capital, with the RBI saying that no missed payment should be considered a default and reported to credit information companies.
The home loan segment will be less affected because majority of the borrowers are salaried and collections are through auto-debit instructions. In contrast, affordable housing loans could witness challenges because of higher proportion of self-employed borrowers, whose income streams have been affected by the lockdown, the agency said.
Other Major Impacts on NFBCs due to Corona
Markets rolling down, once known as the most preferred stocks, most of the NBFCs have lost close to approximately 30% to40% value in the last one month.
The revenue stream of all NBFCs will be hugely impacted as there would be a significant drop in transactions, loan repayments, etc. at all levels countrywide. This means less collection by the NBFCs impacting their day to day operations and profitability.
Affected businesses due to COVID-19 may take time to repay their loans and would further require financial assistance to weather the storm once the crisis is over.
A crucial pillar to the Indian economy, MSMEs will now struggle to sustain business and this will impact the NBFCs asset quality requirements.
New policy measures or accounting rules could make the NBFCs vulnerable as the coronavirus pandemic looms to push the world into a downturn.
Concluding Thoughts
Finally, to conclude for those NBFCs who are well prepared with their business continuity and contingency plan can quickly respond back post the coronavirus outbreak slows down. A well-prepared organization can definitely bounce back, and NBFCs with proper planning can overcome the impact of this disruption.
In addition, on a positive side and being very optimistic, the weakening economy due to COVID-19 may force Indian government & regulators to take necessary measures and introduce other policy measures to strengthen NBFCs. The critical thing to do now is to stabilize the system, give confidence to the consumers, businesses and industry with capital and reduced interest rates.
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