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March 30, 2020 location Mumbai

Lockdown, moratorium and NBFCs

A credit alert is CRISIL’s opinion on a sharp and specific development. It conveys that CRISIL will revert shortly on the impact of the development on the ratings of those affected.

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 companies1 (NBFCs). The extent of this impact will depend on four factors: asset class, income source of the customer, level of field work in operations, and proportion of cash collections.


The microfinance segment will be the most impacted during the lockdown because collection of repayments involves visit to households, such borrowers typically have weak credit profiles and their income generation activities would be disrupted.


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 second largest asset class of vehicle finance would also face challenges in commercial vehicle loans because curtailed traffic will lead to weak earnings for fleet operators.


Says Krishnan Sitaraman, Senior Director, CRISIL Ratings, “We see the impact continuing after the lockdown ends, based on the profile of borrowers. Those self-employed, in informal jobs, and earning their salary in cash would bear the brunt beyond the near term because the economy will take time to recover. CRISIL has already lowered its GDP growth estimate to 3.5% for fiscal 2021 from 5.2% earlier.”


Any delay in return to normalcy will put pressure on collections and asset-quality metrics. Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.


Disbursement of fresh loans will reduce substantially in the near team and remain muted in the medium term given the expected challenges on the economic front.


Amid the lockdown, the government and the Reserve Bank of India (RBI) have announced a slew of measures to provide relief (please refer to CRISIL’s credit alert titled, RBI moves to ease pressure on borrowers).


The biggest of these is the moratorium on bank facilities for 3 months. It will help lenders in managing their asset classification requirement. CRISIL expects NBFCs to give relief to borrowers genuinely impacted by the lockdown, while those with the ability to repay are expected to meet their obligations and avoid additional interest burden.


Says Ajit Velonie, Director, CRISIL Ratings, “While the moratorium provides some relief on the assets side, it is on liabilities side that challenges could emerge for NBFCs with high share of capital market borrowings. That’s because no moratorium has been announced so far for capital market borrowings (such as bonds and commercial paper) and repayments on these will have to be made on time, during a period when collections would be impacted significantly.”


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 or reinvest in debentures immediately to any substantial extent. However, any restructuring or re-schedulement permitted by the investors will help alleviate the pressure on repayments.


CRISIL is monitoring the liquidity cushion available with NBFCs to meet debt obligations beyond bank loans over the next 2 months.


NBFCs rated investment-grade by CRISIL have high levels of liquidity and/or enjoy strong parentage. Since September 2018, they have focused on maintaining high liquidity levels (including unutilised bank lines), which should help over the next 2 months. CRISIL’s analysis of the top 100 rated NBFCs indicates that a significant majority have liquidity buffer2 of over ~2 times towards the repayment of debt (other than bank loans) due in the next 2 months.


On the other hand, non-investment grade NBFCs fund themselves predominantly via banks or other NBFCs. They have negligible capital market borrowings, but a quick return to business as usual is critical to credit profiles because their liquidity levels are typically low, and there is no benefit of strong parentage either.


The RBI move on targeted long-term repo operations (LTROs) should also provide secondary market liquidity to mutual funds and allow banks to increase their primary market subscriptions, resulting in investment appetite for NBFC debt. However, this may be restricted to NBFCs with superior credit profiles; further the adequacy of the LTRO quantum of Rs 1 lakh crore to meet the near-term liquidity needs of the debt market will also need to be seen.


Further, smooth transitioning of the investor base to banks under the LTRO route is critical. In this context, it is good to see banks, especially from the public sector, willing to provide additional working capital lines to pandemic-affected businesses.


CRISIL is closely monitoring the impact of the lockdown on the credit profiles of NBFCs and will take appropriate rating action where required.


1 Comprising non-banking finance companies, housing finance companies and microfinance institutions; but excluding government owned non-banks
Measured as “(Cash available with NBFC + Unutilized Bank Lines)/(Capital Market Debt falling due till May 31, 2020)”