Asset quality at non-bank lenders IIFL Finance and Indiabulls Housing Finance is “vulnerable” due to the economic contraction, global ratings agency Moody’s Investors Service said on Monday.
The agency said Muthoot Finance the third non-bank finance company it rates is better positioned because of its focus on the gold loans business.
Loan collections have shown an improvement for all the three NBFCs despite the six-month loan repayments moratorium ending in August on a pick-up in economic activity, but “asset quality at IIFL Finance and Indiabulls is vulnerable to economic contraction”, it added.
Till now, various types of support measures for borrowers from authorities have prevented a sharp deterioration of asset quality at the lenders, it added.
“However, we expect delinquencies will eventually increase at IIFL Finance and Indiabulls once the support programs end given the severity of the pandemic’s impact on India’s economy,” the agency said.
A modest loan growth and loan sales will help IIFL and Indiabulls maintain capitalisation despite the weakening of profitability, which will be hurt by credit costs for the loan losses, it noted.
Funding to NBFCs, which had been impacted in the past after the IL&FS crisis, has been stable courtesy portfolio buying by the state-owned lenders to meet their priority sector lending mandates, it said, adding that Indiabulls will continue to face challenges on funding despite this.
In the case of Muthoot Finance, a focus on gold loans will be of help, it said, pointing out that it does not foresee a drop in gold prices the biggest risks while lending against the precious metal to happen.
Muthoot has robust profitability which will help it maintain capitalisation and funding at the current strong level, the rating agency said.
It can be noted that the Indian economy is set to contract by around 10 per cent, despite the pick-up which has been seen lately.
Both Indiabulls Housing Finance scrip gained 1.69 per cent and IIFL Finance rose 1.43 per cent on Monday, as against a 0.44 per cent surge in the benchmark.