Continued Liquidity Stress May Have Deeper Impact On NBFCs, Says Moody’s

Non-bank financial companies are likely to be impacted significantly if the liquidity situation which has been triggered by the IL&FS default continues to remain tight, a Moody's report suggests.

Infrastructure Leasing & Financial Services Ltd. and its subsidiaries are facing a liquidity crisis and has defaulted on debt repayment. The default by IL&FS has also impacted other NBFCs and mutual fund houses.

Moody's Vice-President and Senior Credit Officer Srikanth Vadlamani said the authorities will continue to take measures to limit the scope and duration of the prevailing liquidity challenges, while most NBFCs can cope with multi-weeks of tight liquidity conditions.

The report said the liquidity tightness could lead to higher financing costs for NBFCs, or even difficulty in rolling over their liabilities, because these companies have relied heavily on market borrowing to fund asset growth.

Any effect on the NBFCs will spill over to the broader economy mainly through the credit channel because such organisations are a material provider of credit for the economy, with outstanding loans/GDP at the end of March 2018 registering 13 percent versus banking system loans/GDP of 52 percent.

“Consequently, a slowdown in credit growth provided by NBFCs will dampen overall consumption and economic growth,” it said.

The NBFCs' liquidity management practices suggests that these companies are capable of coping with multi-week liquidity distress, but a prolonged period of liquidity stress will severely weaken their credit standings, the report said. There will not be a significant impact on the credit quality of the country's structured finance sector, nor performance of asset-backed securities, it said.

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