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Covid crisis: Currently major challenges NBFCs need to overcome?

Analysts say India's non-banking financial companies (NBFCs) are facing significant asset quality and liquidity issues as the country fights a new wave of coronavirus infections. As in H1FY21, there could be a drop in securitization volumes, which would hurt non-bank lenders.

The economic impact of various state-imposed limits will be determined by the length and intensity of the restrictions. Expanded restrictions might jeopardize India's NBFC sector's fragile recovery, according to rating agency Fitch, which warned on Thursday that a statewide lockdown was gradually eased starting in mid-2020.

"In this situation, SMEs (small and medium businesses), commercial vehicle operators, microfinance, and other wholesale borrowers are at greater risk of stress, especially when financial buffers have reduced following the severe economic shock over the last year." If the large-scale urban-to-rural labor mobility that occurred in 2020 occurs again, production and supply networks will be vulnerable to labor shortages, according to Fitch.

Simultaneously, authorities appear to be acutely conscious of the credit and liquidity consequences of any broad, lengthy movement restrictions, whereas NBFCs' day-to-day operations are likely to be unaffected by the new rules.

A revival in asset-quality pressure for NBFcs might put the sector under new funding restrictions, especially because many government initiatives that gave funding relief to NBFCs in 2020 have now expired. The partial credit guarantee plan, which supports asset-backed securitization, and the special liquidity scheme, which provides government-guaranteed short-term financial relief, are examples of these. Meanwhile, the Emergency Credit Line Guarantee Scheme (ECLGS) for SMEs has been extended until June 2021, giving these debtors more breathing room. According to Icra Ratings, securitization volumes fell to an all-time low in H1FY21 as a result of the Covid-19 outbreak and the resulting statewide lockdowns, after two years of strong volumes close to Rs 2 lakh crore each. The securitization market saw a solid upswing in volumes during H2FY21 as economic activity gradually returned and loan disbursements picked up steam, even exceeding pre-Covid levels for several NBFCs.

According to the rating agency's calculations, securitization volumes for FY21 were around Rs 85,000–90,000 crore, with Q4 volumes accounting for almost 45 percent of the total

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