Indian non-banks' relief from funding pressure only short-term: Fitch

The Indian government's partial credit guarantee on asset purchases from non-bank lenders will ease funding pressure on the non-bank sector in the short term, Fitch Ratings said on Thursday but added that it does not address investors' long-term concerns about the sector's exposure to stressed real estate.

The initiative announced in the Budget this month comes amid significant pressure on non-bank financial institutions' (NBFIs) wholesale funding due to a lack of appetite from debt capital markets.

The government will provide a first-loss guarantee of 10 per cent on securitised assets issued by NBFIs to banking entities for increasing the flow of funds to NBFIs. The guarantee is more than enough to cover typical losses. The government will cover up to Rs one lakh crore of issuance.

"We estimate that this will cover the NBFI sector's liquidity needs for about six months," said Fitch in a statement. "The provision refers only to financially sound issuers, which may suggest that weaker entities in need of funds may still have to fend for themselves."

Fitch said it is not yet clear what will constitute a sound issuer. The funding stress has been most severe for wholesale financiers, smaller NBFIs and fintechs which have struggled to get even bank funding while large NBFIs still have good access to funding, albeit at a rising cost.

There is a lack of clarity about the duration of the guarantee. The government has referred to a six-month period but it is not clear whether this relates just to how long the scheme is open for (covering transactions that are done within a six-month period) or also to the duration of coverage for each transaction.

"A guarantee for only the first six months following a transaction will do little to encourage buyers. We, therefore, assume that the guarantee will apply for the full life of the assets purchased," said Fitch.

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