Finance companies’ credit risk remains high
S&P Global Ratings said economic conditions have turned adverse for Indian banks due to COVID-19 as the drastic efforts to curtail the spread of the coronavirus have resulted in a sharp economic contraction.
The government’s stimulus package, with a headline amount of 10% of GDP, has about 1.2% of direct stimulus measures, which is low relative to countries with similar economic impact from the pandemic, said the rating agency on 26 June 2020.
The remaining 8.8% of the package includes liquidity support measures and credit guarantees that will not directly support growth.
“We now forecast a 5.0% contraction in the economy in fiscal 2021,” said S&P.
Credit risks remain very high for finance companies in India.
“We expect the deterioration in NBFCs’ asset quality to intensify as the economy slows amid the pandemic. We expect the microfinance segment to be the most affected by the lockdown and other measures in the fight against COVID-19,” it said.
“That is because the microfinance institutions primarily rely on cash collections, and many borrowers with weak credit profiles would have faced disruptions in income generation.”
Home loans are likely to be less affected because the majority of borrowers are salaried and collections are through auto-debit instructions.
However, affordable housing loans, which cater to the weaker economic strata, could face challenges.
Other pockets of stress include loans to real estate developers, loans against property, loans against shares, and loans to the telecommunications, aviation, restaurant, or tourism-related sectors.
Small and midsize enterprises are likely to be more affected in this scenario.
Steps taken by the government and the central bank should provide some respite, added S&P.
Some of these measures may also have the unintended consequence of delayed recognition of the problem loans in the country.
“In our base case, the overall impact on finance companies will be more pronounced than on banks. That is because some finance companies lend to weaker customers and have a high reliance on wholesale funding.”
These companies were already facing a trust deficit since the 2018 default of Infrastructure Leasing & Financial Services, S&P pointed out.
Finance companies also face accentuated liquidity risks. Cash flows are likely constrained as a large proportion of borrowers opt for the moratorium.
Some companies provided a moratorium for more than 70% of their customers.
The finance companies would, therefore, be dependent on liquid assets and refinancing to service upcoming debt maturities.
“Currently, most of the finance companies that we rate in India have sufficient liquidity, comprising liquid assets, undrawn lines from banks, and in some cases funding lines from group companies.
“We could see more differentiation in liquidity available to finance companies, with stronger NBFCs benefitting from a flight to quality.”
Liquidity stress could be high for wholesale lenders with large exposure to property developers, companies without a strong parent, or companies with perceived weak governance, added S&P.
S&P downgraded Shriram Transport Finance Co Ltd and placed the ratings on CreditWatch because we believe challenging operating conditions in the Indian financial sector will lead to asset quality and liquidity stress for the company over the next 12 months.
It has lowered our ratings on Bajaj Finance to reflect weaker operating conditions faced by Indian financial institutions. “In our base case, we believe the company’s asset quality and credit costs will deteriorate over the next 12 months.”
S&P downgraded Manappuram Finance Ltd to reflect the heightened risks associated with economic conditions in India and their high impact on the microfinance segment. That said, the gold-backed loan business has held up relatively well under these conditions, it added.
Power Finance Corp Ltd ratings were lowered to reflect the weakening general economic conditions in India. The power sector was severely hit by COVID-19 due to a decline in manufacturing demand and additional collection challenges for distribution companies that were already structurally weak.
In our view, the government’s Rs.900 billion package to help distribution companies provides only a temporary liquidity solution and doesn’t address fundamental issues with the creditworthiness of the sector, it said. fiinews.com
