The international rating agency Moody’s Investors Service has assessed the ratings of IIFL Finance and Hero FinCorp, while the outlook for the ratings of Muthoot Finance has decreased from negative to stable. The agency also maintained its rating on Muthoot Finance, but lowered the outlook from stable to negative. The agency said that the rating on India Infoline Finance’s corporate family rating, the foreign and local currency debt and the senior secured MTN program rating, as well as the senior unsecured debt ratio, are being assessed for downgrade. Moody’s said on Monday that the rating action follows the rapid and widespread spread of the corona virus outbreak, worsening global economic prospects, volatile oil prices and asset price declines that are causing a serious and widespread credit shock in many sectors, regions and markets.
Domestic non-banking financial companies (NBFCs) have been affected by disruptions in economic activity due to the coronavirus outbreak, which will weaken their credit profiles. Moody’s considers the coronavirus outbreak to be a social risk within the ESG (environment, social and governance) framework, given its substantial public health and safety implications. “Today’s action reflects the impact on the magnitude and severity of the shock on Hero FinCorp, India Infoline Finance and Muthoot and the deterioration in credit quality caused by it.” We expect the asset quality of these companies to deteriorate as a result of surging delinquent loans and defaults, as some customers and businesses will struggle with payments due to falling profits as a result of the 21-day nationwide lockdown, “the agency said in a note.
While the Reserve Bank of India’s (RBI) three-month moratorium will help borrowers without affecting the asset quality ratings of NBFCs, it will also slow the rate at which credit balances are reduced or even ruled out, which in turn will result in a number of loans it performs worse than it would otherwise, the note said.
However, the negative effects of the moratorium are likely to be offset by positive macroeconomic effects resulting from the stimulus provided by the moratorium on loan repayment, which is designed to increase consumer confidence and spending. The moratorium may also support the value of underlying loans, which would otherwise decline if all banks and NBFCs pursue strict repayment terms in times of economic stress, such as today.
“Despite these risks, we expect the quality of Muthoot’s assets to outperform the other two companies, given the focus on gold jewelery loans, backed by highly liquid collateral, the value of which has increased over the past year,” added the comment. .
While these companies have been able to take out new loans and continue to default on bank overdrafts, increasing risk aversion among banks, especially after the Yes Bank crisis and global financial sector volatility, will result in a more challenging financing environment. In the case of India Infoline Finance, the moratorium on debt repayment may affect the ability to execute loans and securitization, which have been a source of immediate liquidity since mid-2018. Given the rating for downgrade, an upgrade for Hero Fincorp is unlikely in the short term. However, the outlook may stabilize once the quality and profitability of assets remain stable in the coming quarters.
Given the negative outlook, an upgrade for Muthoot Finance is unlikely in the short term. However, the outlook may become stable again if solvency and liquidity remain stable in the coming quarters. At the same time, its ratings may be downgraded if the funding and liquidity profile deteriorates significantly over the next 12-18 months. An upgrade is also unlikely for India Infoline Finance, but prospects may return to stability if the company’s solvency and liquidity remain stable in the coming quarters.