The measures announced by the central government for financial institutions as part of Rs 20 lakh crore 'Atma Nirbhar' economic package will help ease their asset risk, but will not fully offset the negative impact from COVID-19 pandemic, says Moody's Investors Service.
Last week, Finance Minister Nirmala Sitharaman announced a support package of Rs 3.70 lakh crore for micro, small and medium enterprises (MSME) sector, Rs 75,000 crore for non-banking financial companies (NBFCs) and Rs 90,000 crore for power distribution companies. This was part of the overall Rs 20 lakh crore economic stimulus announced by Prime Minister Narendra Modi on May 12 to mitigate the impact of coronavirus crisis.
While these measures will help reduce asset risks for the financial sector, they will not fully offset the negative impact from coronavirus outbreak, Moody's said in a commentary titled 'Financial Institutions - India: Support measures to provide relief to the financial system, but will not solve all issues'.
On MSME package, Moody's said the sector was already under stress before coronavirus outbreak and further slowdown in economic growth would lead to more liquidity woes. For NBFCs, it said the support is far lower than the immediate liquidity requirements of those companies and the sector will continue to pose risks to the banks.
Moody's said the relief measures for the NBFC sector will fall short of solving the liquidity needs of the sector. The government will set up a special purpose vehicle that will subscribe to new and existing bonds issued by NBFCs up to a maximum of Rs 30,000 crore.
This is the first instance of direct support to the NBFC sector from the government, but the size of support is far lower than the immediate liquidity requirements of those companies.
Also, the Reserve Bank of India's (RBI) liquidity measures have so far benefited the larger and better-rated NBFCs, while the credit flow to smaller NBFCs has been less effective. "We do not expect these new measures to significantly help the smaller NBFCs and their funding conditions are likely to remain difficult. We expect that NBFCs will continue to pose risks to the banking sector as banks are a large lender to the sector," it added.
On stimulus for power distribution companies (discoms), Moody's said that the liquidity support to will improve near-term cash flows of the firms. Loans from the Power Finance Corporation (PFC) and Rural Electrification Corporation (RFC) to discoms will allow them to repay amounts owed to power generating companies and help their cash flow, easing asset risks for the lenders to the sector, it said.
In a separate report, Moody's said that disruptions from the coronavirus outbreak will worsen the economic slowdown in India that has been underway in the past year, accelerating the deterioration in asset quality at non-banking financial institutions (NBFIs). The weakening solvency at NFBIs in turn will pose risks to the stability of the broader financial system, given banks' large exposures to NBFIs, it said.
"We expect a significant weakening in asset quality at NFBIs, that will worsen the liquidity stress triggered by the three-month moratorium on customer loan repayments," says Srikanth Vadlamani, a Moody's Vice President and Senior Credit Officer.
By Chitranjan Kumar with PTI inputs