The virus-induced lockdown and its impact would worsen the asset quality of non-banking financial companies (NBFCs) and further aggravate their liquidity stress, according to Moody’s. The rating agency warned any deterioration of the health of the NBFCs would impact the operations of banks that have large direct exposures to the sector.

Indian banks have lent Rs 8.07 lakh crore to NBFCs as on March 27, up 26 per cent from the same period last year, according to the RBI.

The sector has been facing liquidity challenges as investors became risk averse after a series of defaults by IL&FS Group in September 2018.

“Asset quality at non-banking financial institutions (NBFIs) will significantly deteriorate as economic disruptions from the coronavirus outbreak deepen an economic slowdown that has been underway in the past few years,” Moody’s said in a report.

The deterioration will be more severe than at banks because NBFCs focus more on riskier segments.

The RBI’s three-month moratorium on repayments of loans would create a significant drain on near-term liquidity at NBFCs, the report said.

Most NBFCs do not have substantial on-balance sheet liquidity because they primarily manage liquidity by matching cash inflows from loan repayments by customers with cash outflows to repay their own liabilities, it said.

“Moratoriums on loan repayments will result in substantial declines in cash inflows over the next few months,” the rating agency said.