Liquidity cover¹ at CRISIL-rated non-banking financial companies² (NBFCs) has improved from a year ago, putting them in a better position to service debt in the near-term, and cushioning the impact of lower collections because of the second wave of the Covid-19 pandemic, a CRISIL Ratings study³ shows.

That is a change from last year, when asset-quality and liquidity fears multiplied after a moratorium on repayments and stringent lockdowns affected collections. This time around, the build-up in liquidity has been a crucial offset.

To be sure, collections have once again been affected in the current fiscal by the second wave. The decline has been more pronounced in May (sequentially) because containment measures in most parts of the country kicked in only in the latter part of April. A gradual lifting of restrictions has resulted in an improvement in collections in June; but to a level still lower than March 2021.

In the wake of the second wave, CRISIL Ratings conducted a study on the liquidity cover across NBFCs, considering two stress case scenarios. In Scenario 1, in view of the collection challenges in the first quarter of fiscal 2022 (especially in May), we assumed collections over the next quarter at 70% of the levels in the past couple of quarters. In Scenario 2, collections were assumed to halve.

In Scenario 1, 96% of CRISIL-rated NBFCs were found to have liquidity cover for three months of debt repayments (see table). In Scenario 2, the number was only marginally lower, at 95%.

Importantly, only 4% of NBFCs (based on Scenario 1) had low cover (less than one time), compared with 8% in our June 2020 analysis, and 23% in April 2020 (refer to annexure).

We find three factors have supported liquidity: fund-raising through special government schemes, improving collections in the second half of fiscal 2021, and limited disbursements.

In the first half of last fiscal, ~45% of the funds raised via bonds were through schemes announced following the first wave of the pandemic, such as the targeted long-term repo operations and partial credit guarantee. Even NBFCs that did not have strong parentage raised as much as ~60% of their incremental bond funding through these routes.

In the fourth quarter, debt market borrowings also began to rebound. Bond and commercial paper issuances in March 2021 saw the highest on-month rise since January 2020. Even bank funding improved ~7% during January 2021 to March 2021. With collections picking up and disbursements subdued, liquidity was bolstered.

Says Krishnan Sitaraman, Senior Director and Deputy Chief Ratings Officer, CRISIL Ratings, “Most CRISIL-rated NBFCs have built significant on-balance-sheet liquidity. This will allow them to manage the impact of the second wave of the pandemic better than the first. Nevertheless, business challenges linked to the pandemic will continue through most of this fiscal. In this milieu, we expect many NBFCs to continue maintaining strong liquidity cover for debt repayments and operating expenses. That would also help them assuage potential investor/lender concerns in the near term.”

Further, a number of NBFCs have raised capital and increased provisioning levels in the past two fiscals, and thus enhanced buffers for asset-side risks. Such steps should limit the impact on balance sheets and help NBFCs regain investor confidence once economic recovery takes root.

The onset of a third wave and its spread, intensity and duration will bear watching.

¹ Measured as: (cash available with NBFCs + unutilised bank lines+ estimated collections)/debt falling due
² Comprises NBFCs, housing finance companies and microfinance institutions, but excludes government-owned non-banks
³ Analysis covers CRISIL-rated investment-grade NBFCs, which constitute around 90% of the industry’s assets under management