INSUBCONTINENT EXCLUSIVE:
Mumbai: The continuing liquidity crunch facing non-banking financial companies is likely to result in increasing bad loans risks for banks
both from these shadow banks as well as from companies relying on such lenders for funding, warns a report.
The spillover of stress among
NBFCs to borrowers, and ultimately to banks, will hinder improvements in banks' asset quality, profitability and capital, which is credit
negative, says a report by Moody's on Friday.
NBFCs have been facing liquidity crisis following the bankruptcy of IL-FS in September
2018.
"Tight funding for NBFCs, a consequence of the default by IL-FS in September 2018, is raising asset risks for banks in an economy that
has grown increasingly dependent on non- banking lenders for the provision of credit," Moody's said in the report.
Owing to liquidity
crisis, NBFCs are forced to reduce lending, leading to funding constraints for borrowers relying on non-bank lenders.
This increases the
risk of loan losses for NBFCs, and as a result, they will continue to have difficulty in obtaining funding, the report said.
"As financial
health of NBFCs deteriorates due to loan losses, they will have greater difficulty obtaining funding, which will exacerbate their funding
It can result in more bad loans from NBFCs for banks, the report said.
Also, as NBFC customers' financials weaken, banks will reduce lending
to them, which in turn will further worsen their funding stress and can lead to more bad loans from these companies for banks, it warned.
A
type of NBFC credit to controlling shareholders, or promoters, of large listed companies across various industries is also emerging as a
source of asset risk for banks.
Corporate promoters use their company shares as collateral to borrow, mostly from NBFCs or mutual funds,
typically for the purpose of making investments, including in external businesses.
"The risk for banks is that promoters with weak
governance can use company resources to repay their debt, causing financial damage to their businesses, which as a consequence, can default
on their own loans from banks, the report said.
Refinancing can be difficult for promoters of companies as investments they make using loans
are often illiquid, a problem made worse by tighter availability of credit from NBFCs.
The report further said the non-bank lenders
collectively have a large market share in retail and SME loans, a segment that has grown rapidly in recent years and now is susceptible to
asset quality deterioration as the economy slows.
"A curtailing of lending by NBFCs will add to risks from retail loans for banks by
reducing the availability of credit that individuals can use for refinancing and by contributing to the slowdown," the agency said.
The
report also said real estate companies are under significant stress, and tighter funding will further increase stress in the sector
It could lead to more NPLs for banks because they have large exposures to NBFCs active in real estate lending.
Banks also have direct
exposures to real estate companies, and the growing stress in the NBFC sector will result in more impairments of bank loans to these
borrowers.
"However, increases in banks' real estate NPLs will be marginal as their direct exposures to real estate companies remain small,
growing more slowly than NBFC loans to the sector," it said.
