NBFCs to face asset quality, liquidity risk due to COVID-19 second wave

Non-Banking Finance Companies (NBFC) of India are likely to face asset quality and liquidity risks owing to the second wave of the COVID-19 pandemic, forecasted credit rating agency Fitch Ratings. Fitch has recently said that NBFCs will face increased challenges if the restrictions to contain the pandemic are expanded or prolonged which in turn leads to economic and operational disruption.

Fitch stated that it had revised India’s GDP forecast for the FY22 to 12.8% in its March, 2021 Global Economic Outlook, from 11% in the previous forecast in December, 2020 due to the unexpectedly strong rebound in economic activity in late 2020 and early 2021.

Fitch said, “The forecast revision incorporated expectations of a slowdown in 2021 due to the flare-up in new Corona Virus cases. However, an increase in the rate of infections and broadening of social distancing restrictions pose downside risks to our projections.”

A hotspot is Maharashtra, the state with the largest economic contribution in India at 13-14% of India’s GDP. Maharashtra introduced stricter social-distancing measures recently in response to rising COVID-19 cases, including weekend curfews and weekday activity restrictions.

The economic impact of these curbs will depend on their duration and severity. Expanded curbs could derail the fragile recovery in India’s NBFC sector since a nation-wide lockdown was gradually relaxed from mid-2020.