Liquidity pressures after COVID-19 disruption will remain high for NBFCs: RBI study

The coronavirus-induced lockdown has led to worsening financing conditions for non-banking financial companies (NBFCs), especially those that lower-rated and private sector ones. As per an estimate, around Rs 1.08 lakh crore worth of borrowings of NBFCs will mature in the next three months, which will put a lot of strain on them. "There are near-term scheduled redemptions of commercial papers and corporate bonds issued by NBFCs. To a certain extent, these could be bridged through increased bank borrowing or group support by some NBFCs. However, given the current financing conditions and developments in the mutual fund sector, the possibility of liquidity pressures remaining elevated for some of these NBFCs, especially those with high dependencies on market borrowing, cannot be ruled out," an RBI study has stated.

Regulatory or liquidity measures taken by the Reserve Bank have had a salutary impact on financial markets, it said, adding that stress was still visible in certain areas. The emerging developments indicate the need for policy interventions, which go beyond liquidity related measures to credit-related ones, it maintained. The RBI study also showed that there was a need for ensuring the flow of credit to NBFCs with "concrete credit backstop" to address the risk aversion in the system.

It believed the recent government measures for NBFCs, such as the special liquidity scheme and the partial credit guarantee scheme were expected to improve the market financing conditions for the sector. The NBFC sector is already struggling with liquidity issues since 2018. The IL&FS related developments in 2018 brought the sector under greater market discipline and the market borrowing costs increased for entities, especially those with perceived asset-liability mismatch issues or asset quality concerns.

Now the recent COVID-19 related disruptions and the developments in the mutual fund sector, which have emerged as one of the major lenders to the NBFC sector, have further impacted the market their financing conditions, it said.

The study also assessed the households' liabilities and found that they peaked in the March quarter of FY20, indicating a rise in the hardships owing to the coronavirus crisis. "Households' gross financial liabilities turned negative in Q12019-20 owing mainly to a contraction in borrowings from commercial banks, but picked up thereafter and peaked in Q42019-20, reflecting apart from the seasonal uptick, higher borrowings induced by COVID-19 related hardships" showed the RBI study.

Also read: Coronavirus impact: Households' borrowings peaked in March quarter, says RBI