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 Moodys 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, Moodys 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 liabilities with assets. This approach exposes them to even minor disruptions in the debt capital markets,” Moodys 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,” Moodys 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.
Moodys 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 their credit standing. 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 assets at 1.3 per cent.
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