NBFIs face rising liquidity stress with risks looming for broader financial system: Moody's

Disruptions from the coronavirus outbreak will worsen economic slowdown in India that has been underway in the past year, accelerating the deterioration in asset quality at non-bank financial institutions (NBFIs), Moody's Investors Service said on Tuesday.

The weakening solvency at NBFIs, in turn, will pose risks to the stability of the broader financial system, given banks' large exposures to NBFIs.

"We expect a significant weakening in asset quality at NBFIs that will worsen the liquidity stress triggered by the three-month moratorium on customer loan repayments," said Srikanth Vadlam, Moody's Vice President and Senior Credit Officer.

NBFIs are more exposed than banks to the coronavirus-led downturn, given their focus on riskier segments, and in particular corporates and the real estate sector which were facing liquidity constraints even before the outbreak.

To alleviate borrower stress, the Reserve Bank of India is allowing financial institutions to provide three-month moratoriums on loan repayments. These measures represent a significant drain on near-term liquidity at NBFIs, as most primarily manage liquidity by matching cash inflows from loan repayments with cash outflows to repay their own liabilities.

And while the government's measurements announced on May 14 to directly subscribe to Rs 30,000 crore of NBFI debt will provide some near-term relief, this will not sufficiently address the NBFI's structural funding issues.

"The weakening solvency of NBFIs will also increase pressure at banks at a time when risks to systemic stability are already elevated following the Yes Bank default, which triggered deposit outflows at some smaller banks," said Vadlam.

( With inputs from ANI )