The support measures announced by the central government for the financial sector as part of the Rs 21 lakh crore economic package might ease credit risk but will fail to achieve its ultimate goal of helping the sector dodge the impact of coronavirus, said Moody’s Investor Service. The rating agency discussed the Rs 3.70 lakh crore support package for the MSME sector, Rs 75,000 crore for the non-banking finance companies, and Rs 90,000 crore for the power distribution firms. Moody’s said, ‘‘While these measures will help ease asset risks for the financial sector, they will not fully offset the negative impact from the coronavirus outbreak.’’
The government-guaranteed, automatic and uncollateralized loans to the MSME sector was termed as the most significant announcement by Moody’s. Although this move will improve the near-term liquidity of micro, small, and medium enterprises, the sector is already dealing with a lot of pain. “The MSME sector was already under financial strain before the outbreak of the coronavirus because of the gradual slowdown in India’s economic growth over the past 18 months and as a consequence have limited capacity to weather another economic shock. The deeper and broader economic slowdown in India’s growth, the more the MSMEs will face liquidity stress, leading to asset quality problems for the financial system,” Moody’s said.
The relief measures for the NBFC sector will fall short of solving the liquidity needs of the sector, according to Moody’s which in place will continue to pose a risk for banks’ asset quality. The government will set up a special purpose vehicle that will subscribe to new and existing bonds issued by NBFCs up to a maximum of Rs 30,000 crore. “This is the first instance of direct support to the NBFC sector from the government, but the size of support is far lower than the immediate liquidity requirements of those companies. The planned debt purchase represents about 2 per cent of the total outstanding debt of the top 20 NBFCs that represent close to 75 per cent of the assets of the NBFC sector,” it added.
For the power sector, the government’s package included a support of Rs 90,000 crore. The move is likely to help the DISCOMs clear their dues and alleviate near-term default risks but will also put PFC and REC under pressure and increase their leverage unless the two companies raise equity capital. “Weak credit profiles of the DISCOMs and low capacity utilization will continue to strain further already stressed conditions of power generating companies,” Moody’s said. PFC and REC have a BAA3 stable rating from Moody’s
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