Ever since the default by IL&FS became public in September 2018, NBFCs as a sector has been facing severe liquidity crisis with investors becoming cautious about funding their activities.
“ Funding difficulties are forcing NBFC to reduce lending, resulting in funding constraints at borrowers relying on non-bank lenders for refinancing” Moody’s said in a report on Friday. “This increases the risk of loan losses for NBFCs, and as a result, they will continue to have difficulty in obtaining funding”
As the financials of NBFC customers weaken, banks will reduce lending to them, and this in turn will further worsen their funding stress. The Reserve Bank data shows that bank funding to NBFCs has slowed down in pace.
“These consequences will ultimately lead to more non-performing loans (NPLs) for banks” Moody’s said. Japan-based financial major Nomura also attributes the NBFC liquidity concerns as a major reason for the economic slowdown in the country.
Funding difficulties are forcing NBFC to reduce lending, resulting in funding constraints for borrowers relying on non-bank lenders. Many borrowers are slow shifting to banks for funds.
Major portfolio of NBFCs loans comprise loans to the real estate sector, as well as structured or equity-backed loans to promoters of large companies in various industries. “These borrowers have had relatively easy access to credit in the past few years as finance companies have aggressively pushed for high-yield loans to them” Moody’s said. Among the 19 largest NBFCs by assets, excluding government- owned companies, 10 have such exposures.
As financial health of NBFCs deteriorates due to more loan losses, they will have greater difficulty obtaining funding, which will exacerbate their funding constraints. This can result in more NPLs from NBFCs for banks.
Also, as NBFC customers’ financials weaken, banks will reduce lending to them, and this in turn will further worsen their funding stress and can ultimately lead to more NPLs from these companies for banks.
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