Mumbai: The continuing liquidity crunch facing non-banking financial companies is likely to result in increasing bad loans risks for banks both from these shadow banks as well as from companies relying on such lenders for funding, warns a report.
The spillover of stress among NBFCs to borrowers, and ultimately to banks, will hinder improvements in banks' asset quality, profitability and capital, which is credit negative, says a report by Moody's.
NBFCs have been facing liquidity crisis following the bankruptcy of IL&FS in September 2018.
"Tight funding for NBFCs, a consequence of the default by IL&FS in September 2018, is raising asset risks for banks in an economy that has grown increasingly dependent on non-banking lenders for the provision of credit," Moody's said in the report.
Owing to liquidity crisis, NBFCs are forced to reduce lending, leading to funding constraints for borrowers relying on non-bank lenders.
This increases the risk of loan losses for NBFCs, and as a result, they will continue to have difficulty in obtaining funding, the report said.
"As financial health of NBFCs deteriorates due to loan losses, they will have greater difficulty obtaining funding, which will exacerbate their funding constraints. It can result in more bad loans from NBFCs for banks, the report said.
Also, as NBFC customers' financials weaken, banks will reduce lending to them, which in turn will further worsen their funding stress and can lead to more bad loans from these companies for banks, it warned.
