The funding stress and liquidity crisis on non-banking financial companies (NBFCs) would continue to trouble and raise assets risk for the economy in the year ahead. The report of global rating agency Moody’s says that “Funding difficulties are forcing NBFCs to reduce lending, resulting in funding constraints at borrowers relying on non-bank lenders for refinancing”. The report published on Friday evening said that this will increases the risk of loan losses for NBFCs, and as a result, they will continue to have difficulty in obtaining funding ahead.
The non-banking financial companies as a lending sector have been facing such a liquidity crisis and cash crunch since September this year when a major NBFC Infrastructure Leasing and Financial Services (IL&FS) default came into the light.
The report has categorically pointed out that the funding crisis of IL&FS is raising asset risks for banks in an economy that has grown increasingly dependent on non-bank lenders for credit.
NBFCs are major providers of loans to the real estate sector, as well as structured or equity-backed loans to controlling shareholders of large companies in various industries. The report has pointed out that real estate companies are under significant stress more crisis in funding will add the stress further in the sector. It explains further that real estate companies have been financing unsold projects with borrowings, on the contrary NBFCs that lend to the real estate sector have grown fast.
On account of NBFC’s funding crisis, banks’ lending to them will be constrained which in return will further worsen their funding stress. The funding to NBFCs has been restricted in recent days, reveals the data of RBI.
The report says that such a sorry situation will ultimately lead to more non-performing loans(NPLs) for banks. Many global agencies have attributed the NBFC liquidity concerns as a major reason for the economic slowdown in the country.