Loan moratorium extension a credit negative for NBFIs' liquidity: Moody's

The extension of a moratorium on loan repayments to their customers until September 1 is credit negative for the liquidity profile of non-bank financial institutions (NBFI), according to Moody's Investors Service.

NBFIs manage their liquidity primarily by matching outflows -- mainly debt repayments -- with inflows from customer loan repayments. The moratorium on customer loan repayments initially effective from March 1 has led to a significant decline in cash inflows and adversely impacted the liquidity of NBFIs.

"The extension of the moratorium will add additional stress to cash inflows which will continue for at least three more months," said Moody's in its latest credit outlook report.

The government and the Reserve Bank of India have announced a series of measures to alleviate liquidity stress at the NBFIs. However, the measures have been mostly ineffective. In the most recent measure announced on May 14, the government said it will guarantee up to Rs 30,000 crore of NBFI debt.

However, only debt maturing within three months is eligible, according to the implementation guidelines. "The short tenure of the debt guarantee means that we expect it to have little effect in alleviating the liquidity stress being experienced by the NBFI sector."

Currently, the moratorium by banks to NBFIs on bank loan repayments is the only meaningful relief for NBFIs to withstand liquidity stress. Bank loans are an important source of funding for NBFIs. Therefore, repayment holidays from bank loans will significantly help NBFIs manage liquidity.

"However, it is not clear whether all of the NBFIs will benefit from the bank moratorium as we expect banks to evaluate individual NBFIs on a case-by-case basis. Further, a moratorium on bank loan repayments does not address the structural access to funding issues of NBFIs," said Moody's.

The impact of the extension of the moratorium will be different for public and private sector banks. Public sector banks, in general, have been much more open to offering moratoriums than private sector banks.

As lockdowns are progressively removed, private sector banks will be much more proactive in their collection efforts, magnifying the difference stand of the public sector and private sector banks.

As a result, public sector banks may end up holding more residual credit risk which will expose them to more asset quality risks. 

-ANI

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