International rating agency Moody’s Investors Service has placed the ratings on IIFL Finance and Hero FinCorp under review, while downgraded the outlook on Muthoot Finance ratings to negative from stable. The agency also retained the rating on Muthoot Finance but downgraded outlook to negative from stable. The agency said the rating on India InfolineFinance’s corporate family rating, foreign and local currency debt and its senior secured MTN programme ratings, and also senior unsecured debt rating are placed under review for downgrade. Moody’s said on Monday the rating action follows 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.
Domestic non-banking financial companies (NBFCs) have been affected given disruptions to economic activity from the coronavirus outbreak, which will weaken their credit profiles. Moody’s regards the coronavirus outbreak as a social risk under its ESG (environmental, social and governance) 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 asset quality of these 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,” the agency said in a note.
Although the Reserve Bank of India’s (RBI) three-month 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, the note said.
However, the negative effects of the moratorium are likely to be offset by positive macroeconomic effects resulting from the stimulus due to the loan repayment moratorium, which is designed to boost consumer confidence and spending. The moratorium may also support value of underlying loans, which would otherwise fall if all banks and NBFCs pursue strict repayment terms during times of economic stress, such as now.
“Despite these risks, we expect Muthoot’s asset quality to perform better than the other two companies given its focus on lending against gold jewellary, which is supported by highly liquid collateral, the value of which has appreciated in the past year,” added the note.
While these companies have been able to attract new loans and roll forward maturing obligations from banks, increasing risk aversion amongst banks, especially after the Yes Bank crisis as well as global financial sector volatility, will result in a more challenging funding environment. In case of India Infoline Finance, the moratorium on debt repayments can affect its ability to conduct loan assignments and securitisation, which have been a source of immediate liquidity since mid-2018. Given the review for downgrade, an upgrade is unlikely for Hero Fincorp in the near term. However, the outlook could return to stable if its asset quality and profitability remain stable over the next few quarters.
Given the negative outlook, an upgrade is unlikely for Muthoot Finance in the near term. However, the outlook could return to stable if its solvency and liquidity remain stable over the next few quarters. At the same time, its ratings could be downgraded if its funding and liquidity profile materially deteriorates over the next 12-18 months. An upgrade is unlikely for India Infoline Finance too but the outlook could return to stable if the company’s solvency and liquidity remain stable over the next few quarters.