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Nonbank financial institutions in Asia-Pacific face escalating funding costs.

Sep 05, 2022 09:00 am

Basis a report and analysis from Standard and Poor, Asia-Pacific's nonbanks navigated the pandemic well, only to encounter a set of risks that may prove more onerous and operationally disruptive. Nonbank financial institutions (NBFIs) face escalating funding costs as wholesale capital markets close to speculative-grade entities. S&P Global Ratings believes a dramatic reversal in sentiment that locks such institutions out of typical financing channels could dent ratings.

"Many regional NBFIs rely on short-term borrowings, and the mismatch of tenors vis-à-vis their assets could quickly become problematic in a funding crunch," said S&P Global Ratings credit analyst Geeta Chugh.

This is confidence-sensitive sector. Its reliance on wholesale markets makes it vulnerable to occasional capital squeezes triggered by a generalized loss in confidence. In 2018-2019, the defaults of Infrastructure Leasing & Financial Services Ltd. and Dewan Housing Finance Ltd. saw liquidity slide for the Indian NBFI sector.


S&P recently downgraded many Mexican NBFIs after defaults by Unifin Financiera S.A.B. de C.V. and Credito Real, S.A.B. de C.V., SOFOM, E.N.R. eroded investor confidence, curtailing entities' access to international debt markets. Mexican NBFIs will also likely find financing conditions in domestic capital markets more restrictive.

"In a climate of war, surging energy costs, economic weakening, radical central bank tightening, persistent COVID disruptions, and routine confrontations among superpowers, markets can be unforgiving. NBFIs need steady, predictable access to funding. Some of the weaker finance companies face increased refinancing risk and strained liquidity," said Ms. Chugh.

This may pose contagion risks in some jurisdictions. The failure of a mid and large-sized finance company would hit the asset quality of lenders and stress the liquidity of peers. While this is not our base case, it is very similar to recent events in Mexico and India.

Securitised pools could also get hit as the bankruptcy of an originator could hinder collections. This would be the state of play at least until substitute servicers were appointed and operational issues sorted. This may be a more material issue in emerging markets.

Such effects vary widely. An NBFI will be more or less vulnerable depending on the lumpiness of an institution's liabilities, the extent of its reliance on short-term borrowing, its dependence on securitization, and entity-specific earnings or asset-quality stress.

Please note this is a report from and analysis from S&P and it does not constitute a rating action.

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