Government’s Financial Support Measures Will Not Solve All Issues: Moody’s

Government’s Financial Support Measures Will Not Solve All Issues: Moody’s
Government’s Financial Support Measures Will Not Solve All Issues: Moody’s
Aparajita Gupta - 19 May 2020

New Delhi, May 19: Last week the Indian government announced a series of support measures to alleviate the credit negative impact on the Indian financial system from the economic disruption caused by the coronavirus outbreak. While these measures will help ease asset risks for the financial sector, they will not fully offset the negative impact from the coronavirus outbreak, said Moody’s Investors Service.

Amongst the measures, the most significant is the government guaranteed, automatic, and uncollateralised loans to Micro, Small, and Medium-sized Enterprises (MSME). Such loans will help improve the MSME's near-term liquidity and ease asset risks for the banks and Non-Bank Finance Companies (NBFCs) who are the key lenders to the sector.

However, the MSME sector was already under financial strain before the outbreak of the coronavirus because of the gradual slowdown in India's economic growth over the past 18 months and as a consequence have limited capacity to weather another economic shock. The deeper and broader economic slowdown in India's growth, the more the MSMEs will face liquidity stress, leading to asset quality problems for the financial system, the analysis stated.

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 the support is far lower than the immediate liquidity requirements of those companies. The planned debt purchase represents about 2 per cent of the total outstanding debt of the top 20 NBFCs that represent close to 75 per cent of the assets of the NBFC sector, the report stated.

“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,” the report stated.