NBFI recovery unlikely in near-term: Fitch Ratings

Fitch Ratings on Monday said recovery of non-banking financial institutions (NBFIs) in near-term is not probable as the sector continues to wrestle with the fallout from the COVID-19 pandemic. "We believe the significant economic disruption and prevailing uncertainty caused by the pandemic will impede a return to a more normal operating environment for NBFIs, with consequences for new loan disbursements, asset quality and provisioning, sector profitability, and funding conditions," Fitch said in a statement.

It said uncertainty would stem from depressed consumer demand and a sustained high level of coronavirus infections, notwithstanding a gradual economic reopening that has improved collections and funding availability since June 2020.

"A near-term recovery for India's non-bank financial institutions (NBFI) is not probable, as the sector continues to wrestle with the fallout from the coronavirus pandemic," Fitch Ratings said.

An investor poll at the annual Fitch on India event, held in early July 2020, revealed that more than 75 per cent participants believed Indian NBFIs would take more than one year to show a convincing recovery in light of the effects of the pandemic. The poll results are in line with Fitch's expectations.

The sector is nearly two years into its crisis, which was triggered by the default of Infrastructure Leasing & Financial Services Limited, and nearly 40 per cent of investors polled still expect it to take another two years before a recovery is evident.

"This is longer than Fitch's base-case assumption, but a downside scenario - where the economy continues to struggle to recover in the aftermath of the pandemic - could prolong the sector downturn beyond the two-year horizon and cause irreversible damage to parts of the NBFI industry, with mid- to small-sized franchises at greatest risk of branch closures and staff redundancies to trim costs. In this scenario, more firms could exit from underperforming business segments," Fitch said.

It said construction finance could witness downsizing amid delayed construction activity and lower unit sales.

Other segments that may also witness consolidation, should the downturn persist, include infrastructure finance, low-yielding corporate loans as well as loans against property in urban areas.

Fitch, however, said that NBFIs in India are highly differentiated, and some lending segments will benefit from a quicker recovery.

Those in gold-backed loan sector could see an earlier revival due to lower ticket sizes, greater market confidence in the loan collateral and a more robust outlook for the rural sector, where many larger gold lenders are focused.

Other commercial segments, such as commercial vehicle finance, should see a gradual pick-up as freight demand improves, although Fitch expects India's GDP to remain weak in the next quarter or two, contracting by 5 per cent in the fiscal year ending March 2021 (FY21) before recovering to 8 per cent growth in FY22.

"We believe a sector turnaround is only likely once loan repayments recover and liquidity buffers have been replenished following months of depressed collection inflow," it added.