INSUBCONTINENT EXCLUSIVE:
MUMBAI: A prolonged liquidity tightness for non-banking finance companies (NBFCs) could impact their credit standings and adversely impact
the broader economy and structured finance segment, global credit rating agency Moody’s said in a note on Monday.
Liquidity tightness
could lead to sharply higher financing costs for NBFCs, or even difficulty in rolling over their liabilities, because of the heavy reliance
of these companies on market borrowings, Moody’s said.
“The current episode highlights the structural vulnerabilities in the liquidity
management practices of Indian NBFIs
In particular, these companies have very little backup liquidity and their liquidity management mainly involves matching their short-term
This approach exposes them to even minor disruptions in the debt capital markets,” Moody’s said.
Any liquidity distress faced by NBFCs
is likely to spill over to the broader economy as these companies have increased their loan exposure at a faster rate than the banking
system at 17.9 per cent in the five years to 2018 versus 10.5 per cent for banks.
“If liquidity conditions remain under stress, then NBFIs
will be forced to curtail lending activities
This will constrict credit supply to sectors where these companies have been most active and have enjoyed large market shares in lending
These sectors include retail lending segments such as housing and LAP, as well as commercial real estate and lending to real estate
developers,” Moody’s said.
Total debt of NBFCs have increased to more than Rs 20,000 crore in March 2018 from less than Rs 15,000 crore
in March 2016, with a strong growth in short term borrowings like commercial papers
Such short term borrowings now constitute more of NBFCs debt.
Moody’s said NBFCs are capable of coping with liquidity distress within a
one-month period, after which this ability will weaken considerably
“In other words, if current liquidity distress extends beyond a multi-week period, these companies will suffer material deterioration in
Indian NBFCs have little excess liquidity on their balance sheets, and manage their liquidity almost solely through matching the maturities
of their assets and liabilities,” the rating agency said.
Housing finance companies have the least cash as a percentage of their total
