Stimulus measures announced by the government last week as part of a Rs 20 lakh crore economic package will help ease asset risks for the financial sector but not fully offset the negative impact from coronavirus outbreak, Moody' s Investors Service said on Tuesday.
Among the measures, the most significant is the government guaranteed, automatic and uncollateralised loans to micro, small and medium-sized enterprises (MSMEs).
Such loans will help improve the MSME's near-term liquidity and ease asset risks for the banks and non-bank finance companies (NBFCs) who are the key lenders to the sector.
However, the MSME sector was already under financial strain before the outbreak of the coronavirus because of the gradual slowdown in India's economic growth over the past 18 months and as a consequence have limited capacity to weather another economic shock.
"The deeper and broader economic slowdown in India's growth, the more the MSMEs will face liquidity stress -- leading to asset quality problems for the financial system," said Moody's.
Relief measures for the NBFC sector will fall short of solving the liquidity needs of sector. The government will set up a special purpose vehicle that will subscribe to new and existing bonds issued by NBFCs up to a maximum of Rs 30,000 crore.
"This is the first instance of direct support to the NBFC sector from the government, but the size of support is far lower than the immediate liquidity requirements of those companies. The planned debt purchase represents about 2% of the total outstanding debt of the top 20 NBFCs that represent close to 75 per cent of the assets of the NBFC sector," said Moody's.
Also, the Reserve Bank of India's (RBI's) liquidity measures have so far benefited the larger and better-rated NBFCs while the credit flow to smaller NBFCs has been less effective.
"We do not expect these new measures to significantly help the smaller NBFCs and their funding conditions are likely to remain difficult. We expect that NBFCs will continue to pose risks to the banking sector as banks are a large lender to the sector."
Liquidity support to power distribution companies (DISCOMs) will improve near-term cash flows of power generating companies.
Loans from the Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) to DISCOMs will allow them to repay amounts owed to power generating companies and help their cash flow, easing asset risks for the lenders to the sector.
Nevertheless, the sharp slowdown in India's economic growth and the continued low capacity utilisation in the power sector will exacerbate the already stressed conditions of power generation companies. For PFC and REC, although the loans carry low risk because of state government guarantees, the new loans will increase leverage unless the two companies raise new equity capital.
Leverage is measured as total assets to shareholders' equity. The government's measures are over and above the RBI's liquidity and other regulatory measures that started in early April 2020.
"So far, the government has not announced the operating details of the scheme, including the timing and the process," said Moody's. (ANI)