NBFC crisis puts finance cos under pressure

New Delhi: Global rating agency Moody's on Monday said pressure on Indian finance companies continues to build up, with some banks heavily exposed to non-bank credit providers, hinting that India's NBFC crisis is far from over, even after a year since the trouble began when a major shadow bank IL&FS Group abruptly defaulted.

"Most Asia Pacific (APAC) banks have passed Moody's stress test on capital, except the banks in India, Mongolia, Sri Lanka and Vietnam, because banks in these jurisdictions have lower starting capital ratios and higher starting problem loan ratios," the rating company said.

Moody's Investors Service's outlook for the banking industry in Asia Pacific is negative over the next 12 months, because owing to the US-China trade dispute, which will weaken economic and trade activity in the region, and erode investor confidence.

"Weaker economic and trade conditions will lead to moderate increase in problem loans for APAC banks," said Eugene Tarzimanov, Moody's Vice President and Senior Credit Officer.

"Meanwhile, the banks' profitability will fall, because they are raising credit provisions while Central banks are cutting interest rates to support economic growth," said Tarzimanov.

Nevertheless, Moody's said that APAC banks have generally maintained good capital and liquidity buffers and the probability of government support for these banks will stay high, except for the banks in Hong Kong, because territory is the only jurisdiction in APAC with an operational resolution regime.

With recurring NBFC fiascos such as the IL&FS and the recent case of DHFL, the government has asked the Reserve Bank of India to consider several proposals to de-stress the NBFC sector, including the creation of a special fund by the Central bank to buy out stressed assets of the top NBFCs.

Sources said the discussions are going on, although the Central bank is not very keen on moving forward. The fund being mulled is in line with the 2008 Troubled Asset Relief Programme (TARP) of the US, under which the government purchased toxic assets and equity from financial institutions to strengthen its financial sector.