Moody's Investors Service on Thursday said that the challenges faced by the nonbank financial companies (NBFCs) pose a 'significant downside' risk to India's growth outlook.
Moody's explained that India's NBFCs are an important provider of credit
to the country's economy and, in the fiscal year ended March 31,
accounted for nearly 17 percent of total loans and one third of total retail
However, the sector got a jolt following the default of Infrastructure
Leasing & Financial Services Ltd (IL&FS). On October 1, the government superseded the board of IL&FS after some of its group entities defaulted on debt payments which triggered concerns of a liquidity crisis in the financial market.
The rating agency believes that the current NBFC crisis will weigh on India's growth prospects and expects the country's economic growth to slow to just above 7 percent in fiscal 2019 and 2020.
"In a downside scenario, a sharper slowdown in NBFI (nonbank financial institutions) credit supply would significantly tighten overall credit availability, drive up borrowing costs and reduce economic growth by around half a percentage point over a few years," Joy Rankothge, a Moody's VP and senior analyst, said in a report.
"Weaker nominal GDP growth over a prolonged period would weigh on India's
fiscal strength and the overall sovereign credit profile," added Rankothge.
Global rating agency said that public sector banks - which account for around
70 percent of system loans - will not be able to increase their lending to
offset the slowdown in credit provided by NBFCs, because such banks are
capital constrained and unlikely to receive further capital allocation
beyond what has been announced by the government.
With private sector banks, Moody's does not expect any further pick up in
these banks' lending to compensate for NBFC shortfalls.
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