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Mumbai, NFAPost: The recent second wave of coronavirus cases will continue to exert near-term pressure on India’s non-bank financial institutions (NBFI), says Fitch Ratings in a new report. This is despite less stringent activity restrictions than in 2020, and cases of infection subsiding rapidly, leading to a gradual reopening of the economy since June.

Fitch Ratings expects NBFIs’ upcoming earnings reports to highlight asset quality weakness and profitability pressure as the impact of recent economic shutdowns becomes clearer.

“Fitch revised India’s GDP forecast for the fiscal year ending March 2022 (FY22) to 10% in its June 2021 Global Economic Outlook (from 12.8% in the previous forecast in March 2021), reflecting lockdowns across much of India to contain the virus,” said Fitch Ratings.

The recovery in the September quarter is likely to be gradual as states reopen cautiously to prevent a third wave of infections amid an uneven vaccination rollout.

Infection spread in rural and semi-urban areas during April-May 2021 was as extensive as in large cities, unlike in 2020 when rural infections were low. This, along with persistent stress in urban markets, will lead to higher non-performing loans and impairment costs for NBFIs. The severity of the credit deterioration will depend on the strength of the economic recovery from here.

Large NBFIs’ liquidity profiles are likely to be supported by improved buffers and sufficient funding access, although prolonged asset quality challenges would constrict their funding. Meanwhile, smaller NBFIs, particularly microfinance and unsecured lenders with regional portfolios, could face greater funding strains.

Extended credit stress would compound pressure on NBFI credit profiles, but we assess Fitch-rated issuers to have some headroom at their current rating levels.

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