Cash-starved NBFCs tap NCD market

The current liquidity crisis following the IL&FS fiasco has hit the business prospects of several sectors such as infrastructure equipment makers, real estate players and non banking finance companies (NBFCs), which are dealing with high cost of funds.

Kailash Baheti, the chief financial officer of Magma Fincorp, sees interest costs rising as the company will now have to depend more on costly retail funds than bank credit or other cheaper alternative source of funds from the debt market, which were so far available to the NBFC sector.

Magma Fincorp, a leading player in commercial vehicle finance with a major presence in rural areas, said the company will now have to issue non-convertible redeemable debentures of about Rs 1,000 crore in several tranches over a period of one year for which the board approved a proposal last week.

"We have not been raising funds from the debenture route as funds from the retail market were costlier. It is for the first time that we are going to try. Whatever we used to borrow from the debt market at a comparatively cheaper way like Commercial Paper (CP) wouldn't be available now," Baheti told DNA Money.

Not just Magma, other major finance companies too are now resorting to costly sources of funds.

India Infoline Finance, an NBFC subsidiary of IIFL Holdings, also plans to issue non-convertible debentures of up to Rs 5000 crore over a period.

While dependence on debentures would rise, there would be less reliance on commercial papers which used to be a major source of fundraising for NBFCs.

But following the IL&FS crisis, NBFCs are now looking at funds whose maturity matches their asset profile.

However, increasing reliance on retail sources like debentures would push up the cost of funds and in turn, lead to higher interest charged on consumers.

"Due to the liquidity crisis, cost of funds is expected to go up more. For us, costs would go up roughly by about 50 bps in the second half of the year touching 9.5%. Consequently, we would be passing on that increase to our customers. But for old loans for vehicle finance, we wouldn't be able to pass it on which would impact our net interest margin by about 25 bps," Baheti said.

For most NBFCs, average asset maturity tenure is higher than the average liability maturity tenure. "Majority exposure to CPs, NCDs and debt market instruments and borrowing from mutual funds have a shorter maturity and these are of higher risk in the current scenario," said officials of CreditAccess Grameen, a micro-finance NBFC in a presentation to analysts.

The problem is less acute among the microfinance sectors (MFIs) where average asset maturity tenure is usually lower than the average liability maturity tenure.

CreditAccess Grameen will now be raising Rs 95 crore through external commercial borrowing (ECB) route from International Finance Corp, its first ECB transaction since its listing.

The liquidity crisis is also leading to lost business opportunities as infrastructure projects are getting stalled and NBFCs, which have been playing a key role in equipment financing, are staying away citing lack of funds.

LiuGong, one of the largest wheel loader manufacturers in the world, has its full-fledged plant, its largest outside China, at Pitampura in Madhya Pradesh and saw its business growing by about 35% in the first half of the year.

"But since the past two months, we are feeling the pain as the NBFCs with whom we were dealing with for financing of our equipment for our clients have been facing liquidity issues," Nischal Mehrotra, sales and marketing director of LiuGong India said.

Since the onset of the NBFC crisis, particularly after the IL&FS issue came to fore, Mehrotra has seen orders drying up.

"Some of the large equipment financing NBFCs have shrunk their financing activities and have started dealing with selected customers only," he said.

The dearth of liquidity is also expected to impact demand for the real estate sector, feels Anuj Puri, head of Anarock Property Consultants.

"The NBFC crisis will not only freeze funds to the real estate sector but also impact the flow of private equity as PE players will become extra cautious in lending to developers, become more selective, and engage in extremely deep due diligence before making any plays in the currently tense market environment. In the short term, funding for greenfield projects will cease to exist. This will inevitably impact new launches across cities," he said.

ALTERNATE ROUTE

• Rs 5,000 cr – India Infoline Finance planning to raise via debentures
   
• Rs 1,000 cr – Worth of NCDs to be issued by Magma Fincorp
   
• 35% – growth in business witnessed by China-based LiuGong in H1 this year