APAC’s non-bank financial institutions face liquidity challenges: S&P

One NBFI failure is enough to trigger a domino effect and collapse a whole market.

Non-bank financial institutions (NBFI) in the Asia Pacific face escalating funding costs as they are increasingly locked out of their usual financing channels, S&P Global Ratings warned.

"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 said in the ratings agency’s latest report, "Asia-Pacific's Nonbanks Brace For Funding Squeeze."

“This is a confidence-sensitive sector. Its reliance on wholesale markets makes it vulnerable to occasional capital squeezes triggered by a generalized loss in confidence,” Chugh added.

For example, the defaults of Infrastructure Leasing & Financial Services and Dewan Housing Finance from 2018-2019 saw liquidity slide for the Indian NBFI sector.

"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," Chungh said.

The failure of even a single mid-sized and large-sized finance company would hit the asset quality of lenders and stress the liquidity of its peers, just as what happened in India, Chungh warned.