Ever since the IL&FS crisis in 2018, which was followed by turbulence at Dewan Housing Finance Corporation, non-banking finance companies (NBFCs) have become a subject matter of suspicion and speculation. And the Covid-19-induced challenges have made things tougher for the sector.

In March, international credit ratings agency Fitch Ratings had placed long-term issuer default ratings (IDR) of four Indian NBFCs on ‘rating watch negative’ (RWN). IDR is a measure of the likelihood of a default and the expected financial loss suffered in the event of a default. The four NBFCs are IIFL Finance, Manappuram Finance, Muthoot Finance, and Shriram Transport Finance Company. Fitch had expected the pandemic to present further macroeconomic and funding challenges for these entities, heightening downside risk to their credit profiles.

Now, the ratings agency has taken a fresh look at them. While the ratings of Manappuram Finance and Muthoot Finance have been affirmed at ‘BB-’ and ‘BB’ respectively, their RWN status has been revised to ‘outlook stable’. In the case of IIFL Finance, which has a ‘B+’ rating, the RWN status remains unchanged. For Shriram Transport Finance Company, the ‘BB’ rating is affirmed, while the RWN has been revised to ‘outlook negative’.

In its release announcing the rating actions, Fitch Ratings’ analysts led by Singapore-based Elaine Koh, its director and primary rating analyst, said that the ratings of the entities continue to reflect the considerable economic and financial challenges arising from the pandemic.

Koh, in the release on Monday, said that the ratings agency has revised downwards India’s GDP growth forecast for FY21 by 5% to -10.5%, one of the sharpest negative revisions across the major economies that Fitch tracks. “We expect economic activity to remain below pre-pandemic levels for at least the next year, pressuring system asset quality and funding and liquidity conditions,” the analysts noted. “This is likely to be partly offset by government measures to support the economy and boost funding access.”

Explaining the change in outlook for some of the NBFCs, Fitch said that the removal of RWN and revision to ‘outlook stable’ for Manappuram Finance and Muthoot Finance reflected the entities’ generally resilient performance “in the face of significant economic disruption amid local measures to contain the pandemic”.

RWN status was retained for IIFL Finance because of continued uncertainty on its funding and liquidity, with trends potentially becoming more evident within the next six months, it said. “This is despite a steady improvement in collections over the past few months and easing funding conditions, which have partly benefitted from government support measures for NBFCs and other parts of the economy.”

And Shriram Transport Finance Company’s RWN was removed as Fitch believes that near-term operational uncertainty is easing for the entity. “However, the negative outlook highlights the ongoing downside risk to asset quality and the implication for the company’s funding and liquidity, which we expect will only become apparent in the medium term,” Koh and the team noted.

While the marginal improvement in outlook means that things are improving for these NBFCs, the challenges arising because of the Covid-19 pandemic have to be faced for some more time. And, the sector, which was already under pressure prior to the pandemic, has a lot more pain to go through.

Follow us on Facebook, Twitter & YouTube to never miss an update from Fortune India. To buy a copy, visit Amazon.