Moody's takes rating actions on three Indian NBFCs

Moody's Investors Service has taken rating actions on three Indian non-banking financial companies (NBFCs):

- Hero FinCorp Limited's local and foreign currency Baa3 issuer rating is placed under review for downgrade

- India Infoline Finance Limited's Ba3 Corporate Family Rating (CFR), (P)Ba3 foreign and local currency senior secured MTN program ratings, and Ba3 senior unsecured debt rating are placed under review for downgrade

- Muthoot Finance Limited's Ba2 CFR is affirmed and its outlook changed to negative from stable

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, volatile oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets.

The Indian NBFC industry has been affected given disruptions to India's economic activity from the coronavirus outbreak, which will weaken these companies' credit profiles. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

Today's action reflects the impact on Hero FinCorp, India Infoline Finance and Muthoot of the breadth and severity of the shock, and the deterioration in credit quality it has triggered.

"We expect the asset quality of these three companies to deteriorate on the back of rising loan delinquencies and defaults, as some customers and businesses will struggle with payments given declining earnings due to the 21-day nationwide lockdown across India," says Alka Anbarasu, a Moody's Vice President and Senior Credit Officer.

Although Reserve Bank of India's (RBI) 3-month loan repayment moratorium will help borrowers without affecting NBFCs' asset quality classifications, it will also slow the pace at which loan balances are reduced, or even foreclosed on, which in turn will result in some loans performing more poorly than they otherwise would have.

However, the negative effects of the RBI's measures are likely to be significantly offset by the positive macroeconomic effects resulting from the stimulus due to the loan repayment moratorium, which is designed to boost consumer confidence and spending. The loan repayment moratorium may also support the value of the underlying loans, which would otherwise fall if all banks and NBFCs pursue strict repayment terms during times of economic stress, such as now. That said, the deeper and broader the economic slowdown in India's growth, the more these companies will face asset quality issues.

"Despite these risks, we expect Muthoot's asset quality to perform better than the other two companies given its focus on lending against gold jewelry, which is supported by highly liquid collateral, the value of which has appreciated in the past year," adds Anbarasu.

During the loan moratorium period, the liquidity of the three companies will worsen as loan collections decline. Furthermore, their modest balance sheet liquidity offers limited support if loan collections remain at materially lower levels once the moratorium is lifted.

While these companies have been able to attract new loans and roll forward maturing obligations from Indian banks, increasing risk aversion amongst Indian banks, especially after RBI imposed a moratorium on Yes Bank Limited (Caa1 positive, ca), as well as global financial sector volatility, will result in a more challenging funding environment.

Furthermore, in the case of India Infoline Finance, the moratorium on debt repayments can affect its ability to conduct loan assignments and securitization, which have been a source of immediate liquidity since the middle of 2018. Loan assignment refers to the outright sale of loans to banks. The other two companies have not conducted any loan assignments or securitizations.

The profitability of the three companies will also come under pressure because of lower revenues, higher credit charges and higher cost-to-income ratios as business activity declines.

That said, capital remains a key credit strength for the three companies. Moody's expects the companies' capital reserves to largely remain stable, or decline modestly, as the companies look to conserve liquidity and avoid expanding balance sheets, until funding conditions normalize.

Source : Equity Bulls

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