Mumbai: The government measures to provide partial credit guarantee to public sector bank on their asset purchases from NBFCs can ease funding pressure only for the short-term but it does not address investors' long-term concerns about the sector's exposure to stressed real estate, Fitch Ratings said.
In the Budget, the government had announced that it will provide a first-loss guarantee of 10 per cent on securitised assets issued by NBFCs to banking entities, to increase the flow of funds to the stressed NBFCs. The guarantee is more than enough to cover typical losses. The government will cover up to Rs one lakh crore of issuance. According to Fitch, this will cover the NBFC sector's liquidity needs for about six months.
The provision refers only to financially-sound NBFCs, which suggests that weaker entities in need of funds may still have to fend for themselves, it noted. The funding stress has been most severe for wholesale financiers, smaller NBFCs and fintechs, which have struggled to get even bank funds, while large NBFCs still have good access to funding, albeit at a rising cost, the international rating agency said.
The government has referred to a six-month period but it is not clear whether this relates just to how long the scheme is open for or also to the duration of coverage for each transaction, it said.
“A guarantee for only the first six months following a transaction would do little to encourage buyers and we therefore assume that the guarantee will apply for the full life of the assets purchased,” the agency said.
The report however said NBFCs will benefit more from the Rs 70,000 crore recapitalisation of state-owned banks, which will increase their capacity to lend more.
Investor confidence in the NBFC sector could also be boosted by a potential asset-quality review of wholesale non- banking lenders, leading to greater transparency and more robust capital requirements.
“However, if an asset-quality review uncovers large under-reporting of NPAs, like in the case of banks, it might end up bringing things to a head by making clear to investors which entities have the biggest issues,” it said. No review has been confirmed, but market speculation about the possibility of one has increased with housing finance companies moving under the regulatory ambit of the RBI, the report noted.
