Indian Non-Banks' Credit Profiles to Erode Severely if Liquidity Stress Prolongs

New Delhi India
Image: SoumenNath iStock

Indian non-bank financial institutions (NBFI) will be significantly impacted if the liquidity distress in the country's capital markets, triggered by the default in September 2018 of IL&FS, prolongs for an extended period of time, said Moody's Investors Service on Monday.

"In our base scenario, the authorities will continue to take measures to limit the scope and duration of the prevailing liquidity challenges, while most NBFIs can cope with multi-weeks of tight liquidity conditions ," said Srikanth Vadlamani, a Moody's VP and senior credit officer.

However, prolonged liquidity distress will significantly erode the NBFIs' credit standing, and prove negative for the broader economy and the structured finance sector, he added.

According to the rating agency, liquidity tightness could lead to sharply higher financing costs for NBFIs, or even difficulty in rolling over their liabilities, because these companies have relied heavily on market borrowing to fund asset growth.

The current episode highlights the structural vulnerabilities in the liquidity management practices of Indian NBFIs, the company said.

“In particular, these companies have very little backup liquidity and their liquidity management mainly involves matching their short-term liabilities with assets,” Vadlamani said. “This approach exposes them to even minor disruptions in the debt capital markets.”

The NBFI spill-over

In addition,  any effects on the NBFIs will spill over to the broader economy — mainly through the credit channel — because NBFIs are a material provider of credit for the economy, with outstanding loans/GDP at end-March 2018 registering 13% versus banking system loans/GDP of 52%, Moody’s pointed out.

Consequently, a slowdown in credit growth provided by NBFIs will dampen overall consumption and economic growth, the firm said.

Moody's analysis of the Indian NBFIs' liquidity management practices suggests that these companies are capable of coping with multi-week liquidity distress, but a prolonged period of liquidity stress — which does not represent Moody's base case scenario — will severely weaken the NBFIs' credit standings.

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