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Non-bank financial institutions (NBFI) was already struggling with liquidity issues adding to it for the COVID-19 strike. It does not seem like a near-term recovery for India's NBFI is not possible, stated the rating agency, Fitch.

As per a survey with investors, more than 75 per cent of participants believed NBFIs, which is hit due to the pandemic, would take more than one year to show a convincing recovery.

Nevertheless, the agency added that NBFIs with competitive edge and stronger franchises are better placed to sail through these hurdles. The agency-rated entities have reported “gradual improvements in loan collections and funding access over the past month with the reopening of the economy.”

It has to be noted that a number of NBFIs such as Shriram Transport Finance Company Limited, Mahindra & Mahindra Financial Services Limited, L&T Finance Holdings and HDFC Limited have announced equity issuance plans in recent weeks. “Equity issuance may also pick up in the near term as issuers seek to bolster capital positions.”

For the past two years, NBFI was under tremendous pressure due to the default of Infrastructure Leasing & Financial Services Limited. “This is longer than Fitch's base-case assumption, but a downside scenario — where the economy continues to struggle to recover in the aftermath of the pandemic — could prolong the sector downturn beyond the two-year horizon and cause irreversible damage to parts of the NBFI industry, with mid- to small-sized franchises at greatest risk of branch closures and staff redundancies to trim costs.”

The agency hinted that this scenario may lead many firms to exit from underperforming business segments.

Nonetheless, NBFIs in India are highly differentiated and some lending segments will benefit from a quicker recovery. “Those in the gold-backed loan sector could see an earlier revival due to lower ticket sizes, greater market confidence in the loan collateral and a more robust outlook for the rural sector, where many larger gold lenders are focused.”

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