The success of government's coronavirus pandemic-related support measures for non-banking finance institutions (NBFIs) depends on effective execution and lower risk aversion by banks, but risk to NBFIs' asset quality and liquidity will linger, said Fitch Ratings on Wednesday.

According to Fitch, the funding and liquidity positions of Indian NBFI will remain crucial in coming months, as loan collection inflow is likely to stay subdued even as the economy reopens gradually. The agency expects near-term collections to fall well short of pre-pandemic repayment schedules amid the extended economic shutdown.

"The economy has suffered significant damage and we expect a lagged recovery. Acceleration in coronavirus cases could impede process and banks - the major source of NBFI funding - are still wary of looming asset-quality pressure," the global rating agency said.

The nationwide lockdown to contain the spread of COVID-19 pandemic have caused significant economic damage, which will continue to weigh on India's GDP for much of 2020. Loan collections are likely to remain under significant strain as a result, and the risk of moratorium balances slipping into non-performing status is high, Fitch said, adding that an extension of moratorium could also prolong liquidity challenges for NBFIs.

Given the rising number of coronavirus cases, a fresh clampdown cannot be ruled out if ongoing relaxations cause the infection rate to accelerate, it said.

Finance Minister Nirmala Sitharaman last week announced a Rs 75,000 crore economic stimulus for NBFIs. This includes a Rs 30,000 crore special liquidity scheme for non-banking finance companies, housing finance companies and micro-finance institutions that are finding it difficult to raise money in debt markets and also a Rs 45,000 crore partial credit guarantee scheme 2.0 for those with low credit rating to help them extend loans to individuals and MSMEs.

Fitch said that the government guarantee schemes for NBFIs announced on May 13 may help address banks' risk aversion towards the sector. However, the structure that offers the strongest protection - the fully guaranteed liquidity scheme on investment-grade NBFI paper - only represents around 1 per cent of outstanding NBFI debt. The agency expects the scheme to benefit small and mid-tier NBFIs in attracting funding due to the full credit risk mitigation - but access is likely to be rationed given the facility's modest size.

According to Fitch, pandemic-related liquidity support has mostly yielded lacklustre results to date. Local corporate bond spreads continued to rise despite multiple rounds of support since early March. "NBFI spreads have widened even further and remained elevated after the recent announcements; easing spreads and increased issuance will be key signals of improved appetite for NBFI debt," the agency said.

Downside risk for NBFIs' asset quality and liquidity persists, even as the economy restarts, it added.