India Ratings and Research (Ind-Ra) has placed the Shriram Transport Finance Company’s Long-Term Issuer Rating of ‘IND AA+’ on Rating Watch Negative (RWN). The Outlook was Stable. The Short-term Rating has been affirmed at ‘IND A1+’.
The RWN reflects limited near-term visibility on the impact of the measures taken by the authorities to contain the spread of the COVID-19 pandemic on STCF’s asset quality and credit costs. The agency believes the loss of income over an extended timeframe because of the lockdown will have a detrimental impact on the borrowers’ cash flows and disrupt collections of non-banking finance companies (NBFCs), while increasing the credit risk significantly, given the borrowers’ weak profile. This, along with a likely sharp slowdown in the economic activity (FY21 GDP forecast revised to 1.9% from 5.5%), could considerably elevate softer-bucket delinquencies and higher transition of softer buckets to stage-3 delinquencies.
The agency also remains cautious over the tightening market conditions, which could impact the funding sources. STFC’s domestic borrowing spreads have been higher than the historical average since the onset of the liquidity crisis for NBFCs in September 2018. The agency believes that while STFC navigated the tough liquidity conditions by augmenting new channels of funding (foreign currency borrowing), any incremental funding from domestic mutual funds and foreign sources could face challenges amid the uncertainty in the global economic scenario and domestic credit markets, and further increase funding costs.
