The RBI has cautioned that India’s non-banking finance companies (NBFCs) are not out of the woods yet as some of them could face elevated liquidity pressures and difficulties in meeting their funding requirements through market borrowings.
Even as the central bank has taken several steps to alleviate problems faced by the non-bank lenders, the July bulletin of the RBI said that despite these steps, stress is still visible in certain areas of the market.
“This appears to suggest that the problem is not just of liquidity but, possibly, of expectations of deterioration in credit quality on account of Covid-19 related disruptions,’’ the RBI paper said.
India’s NBFC sector saw tough market financing conditions after the IL&FS episode. Though conditions improved since then, particularly for the better rated ones, the Covid-19 outbreak has once again put the sector in a difficult terrain amid apprehensions that credit profiles of these lenders could deteriorate, given the moratorium extended by them on their assets as well as the overall environment of heightened risk aversion.
“Recent developments in the mutual fund industry, which is one of the major source of funding for NBFCs, have also led to apprehensions that NBFCs may face rollover risks,’’ the RBI bulletin said.
“The possibility of liquidity pressures remaining elevated for some of these NBFCs, especially those with high dependencies on market borrowing, cannot be ruled out.
“To a certain extent, this gap could be bridged through increased bank borrowing or group support by some NBFCs. However, one of the major lenders to NBFCs – the mutual fund industry – is also facing challenges due to the uncertain economic outlook and the impact of closure of a few debt funds,” RBI said.
Rating assessment
RBI governor Shaktikanta Das on Thursday sought credit rating agencies’ assessment of the macroeconomic situation and their outlook on various industries, including the financial sector.
The RBI governor met managing directors and chief executives of credit rating agencies through a video conference. The meeting was also attended by RBI deputy governors and other senior officials.
Other issues discussed included perspectives on the overall financial health of the entities rated by the CRAs and major factors that affect credit ratings in the current context.
The RBI also sought feedback on ways to further strengthen the rating processes and engagement with key stakeholders.
“To a certain extent, this gap could be bridged through increased bank borrowing or group support by some NBFCs. However, one of the major lenders to NBFCs – the mutual fund industry – is also facing challenges because of the uncertain economic outlook and the impact of closure of a few debt funds. In this context, the possibility of the NBFC sector, at least some of the NBFCs, facing headwinds in meeting their funding requirements through market borrowing cannot be ruled out,’’ the RBI said.
While the central bank has taken steps to ease liquidity constraints, the paper said that though these measures have considerably eased the stress in market conditions, it is still visible in certain areas of the market.
Here the bulletin said that there is a need for ensuring flow of credit or liquidity to NBFCs with concrete `credit backstop’ measures to address the risk aversion in the system, bridge the trust deficit and restore confidence.
In the medium term, there is also a need to deepen the corporate bond markets, apart from diversification of the investor base and increased participation from long term investors.
In the first round of the targeted long term repo operations (TLTRO), the bulletin said it had a salutary impact on the market.
Apart from a significant uptick in the corporate bond market and a moderation in the liquidity pressures faced by various entities, including NBFCs, the weighted average rate of issuances in the 2-3 years bucket was also lower by around 150 basis points in April.
With regard to NBFCs, the weighted average rate of issuances in the bucket softened by 85 basis points.