Shares of NBFCs, particularly the housing finance companies, plunged on Friday, with midcap stocks – scrips that have a market capitalisation between Rs 50 billion and Rs 200 billion – losing nearly Rs 100 billion.
Non-banking finance companies are facing a tough time with regard to recovery from big projects and that the Reserve Bank of India is aware of their precarious health, officials have told DNA amid concerns arising out of the IL&FS crisis.
"We are auditing the IL&FS financial arms over the default in money market instrument, and also looking at other NBFCs and their parent companies over their loan exposure and recovery track which is not working as it should be," said an RBI official requesting anonymity.
The apex bank is also in touch with the National Housing Bank to monitor the problems faced by the housing finance companies, said the official. NHB is the regulator of housing finance companies.
Shares of NBFCs, particularly the housing finance companies, plunged on Friday, with midcap stocks – scrips that have a market capitalisation between Rs 50 billion and Rs 200 billion – losing nearly Rs 100 billion. The shares of Dewan Housing Finance Corporation Ltd fell up to 60 per cent on BSE after DSP Mutual fund sold bonds worth Rs 200 crore on Friday.
In the middle of the chaos, IL&FS Financial Services MD & CEO Ramesh C Bawa has resigned and his resignation effective from Friday, sources said.
Analysts said that the nature of HFCs is to have a negative asset-liability-mismatch (ALM) – when a company's assets and liabilities do not correspond. In such cases, their liabilities (sources of financing) will have to re-priced multiple times during the life of assets (housing loans).
"In an increasing interest rate scenario (such as current times), a higher proportion of shorter tenure funding against a higher portion of long-term assets would be harmful," said an analyst.
According to a report by Ambit Capital, NBFCs and housing finance companies have an exposure of Rs 2.2 trillion of the Rs 4 trillion real estate loans market, while commercial banks' exposure is almost half at Rs 1.8 trillion only.
Market analysts the Infrastructure Leasing and Financial Services Ltd (IL&FS) crisis has triggered the selloffs. Its non-convertible debentures worth Rs 6.3 billion held by DSP Mutual Fund were downgraded to junk after it failed to repay the Small Industries Development Bank of India Ltd (SIDBI), prompting a special audit by the RBI.
While DHFL said that it had no exposure to IL&FS, it is likely that many more NBFCs will fail to roll over their short-term borrowings due to contagion effect. "With events like the IL&FS default, the situation gets aggravated squeezing the liquidity from the money markets," said Jagannadham Thunuguntla, senior VP and head of research (wealth) at Centrum Broking Limited.
What’s in store for investors
Short-term events keep on coming to the markets. Investors should not react but stay put, according to Rahul Shah, vice president–equity advisory group, Motilal Oswal Securities. Hemang Jani, head- advisory, Sharekhan by BNP Paribas, said the sentiments have turned cautious. Banks and non-banking finance companies (NBFCs) expected to remain under pressure till bond yields remain high (above 8%) and there is over ownership across investors, he said.
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