Govt's steps to ease NBFC liquidity crisis too short-term: Fitch report
Nevertheless, the research claimed that NBFCs will gain more from the recapitalization of state-owned banks in the amount of Rs 70,000 crore, which would improve their ability to lend more money.
According to a research, the government's initiatives to offer public sector banks a partial credit guarantee on their asset purchases from NBFCs can only temporarily reduce funding pressure.
For purchases of highly rated pooled assets from financially stable NBFCs totaling Rs 1 trillion during the current fiscal year, the government had stated in the budget that it would offer public sector banks a once-off, partial credit guarantee of up to six months for their initial loss of up to 10%.
However, as rating agency Fitch noted in a report on Thursday, the action does not resolve investors' long-term worries about NBFCs' exposure to distressed real estate.
"Typical losses are more than covered by the guarantee. One trillion rupees worth of issuance will be covered by the government. This will likely satisfy their cash needs for around six months, according to our estimates "the agency reported.
It was noted that because the clause only applies to NBFCs that are financially stable, it implies that less strong organisations that require funding may still be left on their own.
While major NBFCs still have adequate access to finance, albeit at a rising cost, the financial stress has been most acute for wholesale financiers, smaller NBFCs, and fintechs, all of which have found it difficult to obtain even bank funds.
The government has mentioned a six-month timeframe, but it's unclear whether this refers to only how long the programme is open for or also the length of time that each transaction is covered, it added.
According to the agency, "a guarantee for just the first six months after a transaction would do little to entice buyers and we thus presume that the guarantee will extend for the whole life of the assets purchased."
The study said that the recapitalization of state-owned banks for Rs 70,000 crore, which will boost their ability to lend more, will help NBFCs more.
A prospective examination of the asset quality of wholesale non-banking lenders, which would result in increased transparency and more stringent capital requirements, might help increase investor trust in the NBFC industry.
However, it added, "If an asset-quality assessment reveals significant under-reporting of NPAs, as in the case of banks, it may ultimately bring things to a head by making plain to investors which organisations have the worst concerns."
The move of home finance businesses under the regulatory purview of the RBI, the study stated, has fueled market speculation about the potential for a review, though it has not been confirmed.
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