As per the Fitch Ratings, with the resurgence of the second wave of covid-19, India’s non-bank financial institutions (NBFC) face renewed asset quality and liquidity risks and could delay recovery in the sector.
The agency said if recent restrictions to curb the spread of coronavirus are expanded or prolonged, there would be a great challenge leading to greater economic and operational disruption.
India’s economic growth forecast for the fiscal year ending March 2022 (FY22) has been revised by the agency to 12.8 per cent in March 2021, from 11 per cent as predicted previously in December, owing to the unexpected improvement in economic activity in late 2020 and early 2021.
The revised forecast suggests a slowdown in the second half of Q21 due to a rapid increase in novel coronavirus cases. However, surging infection rate and broadening of social distancing restrictions can pose downside risks to projections.
In note, Fitch said, “SMEs (small and medium enterprises), commercial vehicle operators, microfinance and other wholesale borrowers remain at greater risk of stress in this environment, particularly as financial buffers would have narrowed after the severe economic shock over the past year. Production and supply chains remain susceptible to labour shortages if the large-scale urban-to-rural labour migration in 2020 recurs.”
Indian states have taken steps to control the spread in the form of curfews and weekday restrictions till the end of April. Fitch said the duration and severity will decide the economic impact of these curbs.
Expanded curbs could derail the fragile recovery in India’s NBFC sector since the lockdown norms were gradually relaxed from mid-2020.
The risk of stress in this environment is likely to hit SMEs, commercial vehicle operators, microfinance and other wholesale borrowers. The production and supply chains may remain prone to labour shortages if the large-scale exodus of migrant labourers from urban to rural India recurs.
As per the national government and authorities in several states, the fresh restrictions will not be as extensive as those that happened in April-June 2020, particularly in a scenario of vaccine rollout progresses.
As observed in other countries, Consumers and businesses are likely to better adapt their economic activity to the second wave of restrictions, said Fitch. Regulators are tracking the credit and liquidity implications of any broad, extended movement curbs, while NBFIs’ day-to-day operations sustaining continue under the latest rules.
As per the statement of Abhishek Dafria, vice-president and head – structured finance ratings, Icra, to Financial Express, “ The rising Covid cases may again create uncertainty among investors. While the lockdowns announced so far are less restrictive in comparison to the nationwide lockdown seen last year, an unabated increase in Covid cases is likely to bring about fears of harsher lockdowns which could impact the asset quality of retail loans. This in turn would impact the fundraising ability of the NBFCs and HFCs through securitisation of their assets. Successful implementation of the vaccination programme and ability of government agencies to arrest the rising infections would remain critical in the near term.”
Amidst this, The Emergency Credit Line Guarantee Scheme for SMEs till June 2021 has been extended which will offer such borrowers further breathing room.