Mumbai: For the non-banking finance companies (NBFCs), quarter four (Q4) is usually strongest in terms of disbursements but currently an asset quality is a big pull back for the sector. That said, the announcement by the central bank, the Reserve Bank of India (RBI) to allow a three-month moratorium on term loan installments by lending institutions would be availed by most of the NBFCs, would also alleviate the pressure on their borrowers to meet the loan obligations. However, the experience on asset quality post a moratorium period would not be encouraging opines India Ratings and Research (Ind-Ra).

“The incorrect interpretation of the loan moratorium as a loan waiver by borrowers, or political intervention is an additional overhang. This could give rise to idiosyncratic risk in some of the informal asset classes. If banks become selective in offering the moratorium, then entities with strong liquidity buffers would remain afloat through these challenging times especially if they offer a moratorium to their customers,” says Pankaj Naik, Associate Director, Ind-Ra. Further irrespective of the moratorium is offered, the most vulnerable segments where the borrower with the weak profile followed by high cash collection will have to face a greater extent of income disruption followed by a long-drawn normalisation process for these entities.

The agency believes that severity of challenge going ahead is uncertain and a lot will depend on the withdrawal of restrictions and pace of recovery of normal economic activity. “Ind-Ra’s base case assumption is that the disruptions could last till mid-May before normal the cash flow normalisation starts. Having said that, each class of customer will show a varying ability of bouncing back to normalcy depending on their profile. Most Ind-Ra rated NBFCs in investment grade carry adequate liquidity (liquid investments and unutilised bank lines) to meet their committed obligations of fixed cost and financial obligations even if the collection were to drop substantially for the next two months,” says Naik.