Financial stocks plunged up to 18 percent on BSE in intraday trade on Monday after the rating agency Fitch downgraded three Indian nonbank financial institutions (IFNB).
Fitch Ratings lowered the default ratings for long-term issuers (IDR) of Shriram Transport Finance Company (STFC) and Muthoot Finance (MFL) to “BB” from “BB +”. It also downgraded the long-term IDR of India Infoline Finance (IIFL) to “B +” from “BB-“. All of their ratings were placed on Rating Watch Negative (RWN). Fitch also placed Manappuram Finance’s long-term “BB-” IDR on RWN.
STFC, Bajaj Finance, Bandhan Bank, Housing Development Finance Corporation (HDFC), Manappuram Finance, Cholamandalam Financial Holdings and Mahindra & Mahindra Financial Services lost more than 10% compared to BSE.
Financial services of Ujjivan, the Federal Bank, HDFC Bank, ICICI Bank, City Union Bank, Shriram City Union Finance, RBL Bank, IDFC First Bank and Cholamandalam Investment and Finance Company were down 5 to 10%.
Fitch Ratings said the rating actions reflect the growing macroeconomic challenges for the Indian NBFI sector. These include the growing effects of measures to contain the COVID-19 pandemic, which will worsen the tightening of funding conditions for NBFIs in recent weeks.
Recent RBI liquidity and regulatory support measures are expected to help improve the short-term funding environment, but they also highlight the gravity of the situation, but Fitch sees persistent uncertainty in the months to come.
Fitch also expects business constraints to cause operational disruptions that will directly affect the quality of assets.
This is in addition to the poor quality of existing assets in NBFIs and the undercapitalization of the banking system, which are expected to continue to hamper growth and funding for the NBFI sector.
Fitch recently revised India’s GDP growth forecast for the year ending March 2021 (FY21) down to 5.1% from 5.6% previously, and risks are biased downward as authorities try to contain the virus.
Among individual stocks, STFC shares slipped 18 percent to Rs 596 on BSE on Monday. Fitch Ratings stated that the downgrade and RWN of the STFC ratings are largely due to the deteriorating operating environment of Indian NBFIs. STFC’s portfolio will face increased asset quality risks as the commercial vehicle portfolio is more exposed to commercial activity in India which will be hampered by measures taken to combat the coronavirus, he added. ,
Fitch anticipates delays in loan recovery and asset recovery if the current restrictions on business are extended. This would put short-term pressure on asset quality, credit costs and profitability.
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