NBFCs to shift focus from growth to stability

The outlook for non-banking financial companies (NBFCs) for the next year might still be looking weak, but gradual improvement in liquidity situation indicates that stabilisation is likely in the next few months.

A recent report by Motilal Oswal Financial Services said the crisis of confidence appears to have turned the corner with the liquidity situation gradually improving. "Stabilisation is just a few months away," the report said.

Commercial paper (CP) roll-overs, an indicator of liquidity, are up from 40% in October to 75% in November.

However, the report also added that the liquidity situation for NBFCs "may continue remaining tight" and the growth rates are likely to "moderate". To tackle these pressures, companies are likely to shift their focus toward matched asset-liability management (ALM) and liability diversification as most of them are now looking to raise funds via the retail channel – non-convertible debentures (NCD)/deposits.

Brokerage firm Sharekhan said the outlook for NBFCs is still weak due to ALM recalibration requirement that has impacted liquidity and credit flow to specific segments.

The uncertainty on the interest rate front has also led to a moderation in the flows into debt mutual funds, which along with cautious lending by banks, is likely to moderate the flow of funds toward NBFCs, according to the Motilal Oswal report.

Moderation in the lending growth will also hit the profitability.

Asset quality trends are likely to be mixed. Wholesale financiers will be impacted the most, while vehicle financiers appear to be relatively insulated from such pressures.

"Thus, loan growth might moderate, despite strong demand at the ground level. Wholesale financing is likely to be impacted the most," Motilal Oswal said in its report.

Since the demand at the ground level remains strong, companies are not much concerned about asset quality in the retail segment but the coast is not as clear for the wholesale segment is concerned. As the refinancing market for project or developer loans is likely to dry up, the construction finance and infrastructure segments could face some headwinds.

Rating firm Crisil expects the growth rate to moderate in the second half of the current financial year (FY) to 5% year-on-year versus 10% seen in the first half on account of hiccups in wholesale financing/loan against properties.

Thereafter, Crisil expects the growth to pick up to 15% over FY19-21.

Sadanand Shetty, chief investment officer, Truequity Advisors said NBFCs have gone through super high growth pace due to easy liquidity in the system. But that has got tripped after the IL&FS fiasco. The priority has now shifted from growth to stability. The NBFCs will have to manage and ensure they don't default in the next few quarters.

"Growth has taken a backseat and the earlier growth of 20-25% has completely fallen flat. Most of the NBFCs are also not lending since they don't have adequate capital," Shetty said.

Post the IL&FS crisis, the incremental borrowing cost for most players is up by 60-120 basis points, said the Motilal Oswal report. One basis point is a hundredth of a percentage point.

According to the report, most players are looking to diversify on the liability side and reduce dependence on banks and mutual funds for capital. NCD proportion for NBFCs is up to 41% from 25% in FY12. The focus now will be on tapping resources from new avenues like retail NCD, deposits, insurance, pension and EPFO funds.

The report further said the overall cost of funds is likely to go up by 70-90 bps over the near term and limited ability to pass on the increased cost in some products like home loans, wholesale financing and loan against property (LAP) will impact NBFCs' profitability. Also, firms are likely to build up liquidity on their balance-sheets which will impact spreads due to negative carry. While the liquidity situation has been improving over the past two months, higher cost of funds and slowdown in growth will impact the sector as a whole.

Kotak Institutional Equities in its recent report said systemic liquidity has improved during the last few weeks. The rollover of NBFC instruments by mutual funds has been high and the overall NBFC funding by mutual funds (CP+NCDs) increased month-on-month in November 2018. The funding cost (across tenure of 1-5 years) of large housing finance companies (HFCs) has moderated a bit in recent weeks after peaking out in September/October.

Most NBFCs/HFCs also indicate that liquidity has not been aconstraint over the last few weeks though some of the players were likely going slow till November and maintaining more liquidity on the balance-sheet. However, risks in the developer lending segment and impact of likely implementation of RBI norms on external benchmarking of retail loans are the two aspects to watch out for, the Kotak report said.

Mutual funds' exposure to NBFCs increased to Rs 5 lakh crore in November from Rs 4.86 lakh crore in October 2018. NBFCs have about 50% market share in real estate lending, the report also said.

It further added that with easing of CPI inflation in November, it expects 50 bps rate cut in the calendar year 2019 and finds anincreased probability of a rate cut in the February meeting itself.

Select HFCs, on the other hand, which have been severely affected during the liquidity crisis, will likely need to structurally slowdown from 25-30% growth rates reported earlier, when debt markets were more sanguine, it said.

Troubled Watrers 

• The overall cost of funds is likely to go up by 70-90 basis points over the near term
• Limited ability to pass on the increased cost in some products will impact the profitability