Moody's Investors Service on Tuesday said the Covid-19 outbreak will accelerate the deterioration in asset quality of non-bank financial institutions (NBFIs).
The investor service said that weakening solvency at NFBIs will, in turn, pose risks to the stability of the broader financial system, given banks' large exposures to NBFIs. At present, NBFIs are more exposed than banks to the coronavirus-led downturn, given their focus on riskier segments, and in particular, corporates and the real estate sector which were facing liquidity constraints even before the outbreak.
Consequently, to alleviate borrower stress, the Reserve Bank allowed financial institutions to provide three-month moratoriums on loan repayments.
These measures represent a significant drain on near-term liquidity at NBFIs, as most primarily manage liquidity by matching cash inflows from loan repayments with cash outflows to repay their own liabilities.
While the Centre's move to directly subscribe to Rs 300 billion of NBFI debt will provide some near-term relief, this will not be sufficient to address the NBFIs' structural funding issues.
"We expect a significant weakening in asset quality at NFBIs, that will worsen the liquidity stress triggered by the three-month moratorium on customer loan repayments," says Srikanth Vadlamani, a Moody's Vice President and Senior Credit Officer.
"The weakening solvency of NFBIs will also increase pressure at banks at a time when risks to systemic stability are already elevated following the Yes Bank default, which triggered deposit outflows at some smaller banks," he added.
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