Trust deficit, disruptions in markets due to defaults by NBFCs; may put strain on weak firms: S&P

India’s financial markets are facing a ‘trust deficit’ and disruptions due to defaults by a major non-banking finance company which could put a strain on weaker firms, S&P Global Ratings said on Wednesday.

Spreads have widened, and short-term borrowing costs have spiked since Infrastructure Leasing & Financial Services (IL&FS), an infrastructure development and finance company with a high domestic rating, defaulted on loan repayments in August and September. The corporate governance concerns are adding to risk aversion.

“India’s financial markets are facing a trust deficit. The disruption could put a strain on weaker companies as well as finance companies,” S&P Global Ratings credit analyst Geeta Chugh said.

“While liquidity stress has begun to gradually ease, we expect tougher conditions could linger for months. Indian companies including nonbank finance companies (NBFCs) are vulnerable to spiking interest rates because they have increased reliance on short-term debt, after years of relatively good financing conditions for shorter-dated paper,” S&P said.

Rated Indian companies are better positioned because they tend to have manageable short-term obligations and good liquidity.Nevertheless, costlier or restricted financing could delay some growth plans and hurt profitability.