Asset quality at NBFCs, IIFL Finance and Indiabulls Housing Finance, is 'vulnerable', noted Moody’s in a recent report. However, another NBFC, Muthoot Finance is better positioned, it added.
The vulnerability in asset quality in IIFL Finance and Indiabulls Housing is on the back of economic contractions. Even though both companies reported improvements in loan collections and relatively stable asset quality for the first half of FY21, yet they will inevitably face increases in loan delinquencies when government support measures end, the rating agency explained.
However, Muthoot Finance is better positioned as a surge in gold prices aided loan recoveries and disbursements.
Going forward, it added that modest loan growth and loan sales will help IIFL and Indiabulls maintain capitalisation despite the weakening of profitability.
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.
Despite an anticipated deterioration of asset quality and profitability, funding for IIFL Finance will be stable as public sector banks
continue to purchase its loans, easing liquidity stress for the sector.
However, funding conditions will remain more challenging for lower-rated Indiabulls, and the company will need to continue to shrink
its assets to conserve liquidity added Moody's.
Muthoot has robust profitability which will help it maintain capitalisation and funding at the current strong level, the rating agency said.
"Asset quality at gold loan-focused Muthoot is likely to hold up better than the other two NBFCs. While gold loans also are susceptible to a sharp drop in gold prices, we do not expect this to occur. Further, Muthoot's robust profitability will help it maintain its capitalization and funding at the current strong levels," Moody's explained.
A focus on gold loans will also be of help, it said, pointing out that it does not foresee a massive drop in gold prices anytime soon.
(Edited by : Abhishek Jha)