RBI guidelines may make small NBFCs prime takeover target

Many small non-banking finance companies (NBFCs) will find it difficult to maintain the liquidity ratios Reserve Bank of India (RBI) has proposed in its draft guidelines that were put out last week for public comments.

This may result in smaller NBFCs being taken over by the bigger players or even by banks, which are looking at inorganic growth to expand their balance-sheets.

RBI's new proposed guidelines will only accelerate the consolidation exercise. However, bigger players say they have a better liquidity cushion. There are about 11,000 NBFCs, with many of them being insignificant, so the proposed guidelines may weed out many of them.

Keki Mistry, managing director and vice chairman, HDFC, said, "There will be some consolidation. But the number of NBFCs is too far in excess and many of them are just registered. There could be just about 200 NBFCs which are into any serious activity. The new proposal may eat into the profits of the smaller NBFCs, but for the system, it is good, with confidence levels of banks and other investors improving due to the liquidity cover."

RBI has proposed that NBFCs will have to maintain a liquidity coverage ratio (LCR) of 60% from April 2020 and achieve 100% coverage by April 2024. LCR is the proportion of liquid assets that a company may have in relation to its short-term repayment obligations. RBI's proposals are good in the sense that they will instill confidence in the counter-parties, experts said. Indiabulls Housing Finance Ltd (IBHFL) has demonstrated this by being able to raise Rs 56,000 crore since the liquidity freeze took the markets last year. The guidelines proposed will instill confidence.

"The higher rated NBFCs are well ahead of the liquidity ratios proposed by RBI with AA rating or more. IBHFL is covered over 900% on the LCR concept suggested by RBI on March 31, 2019. IBHFL has been able to raise Rs 56,000 crore to date from the time the liquidity freeze took over the markets in the middle of last year. IBHFL was holding over Rs 31000 crore of cash as on March 31, 2019. But the guidelines will instill confidence in the counter-parties and enforce market confidence," Gagan Banga, managing director, IBHFL, said.

Dewan Housing Finance Ltd said in a release on Tuesday that it is currently focused in getting a strategic partner, fulfilling all its obligations on time and in building strategy for the company's back-to-business growth.

Analysts said the liquidity situation for NBFCs improved substantially in the fourth quarter of 2018-19. Loans also picked up, especially for housing and loan against property, but the vehicle financing was weak. Wholesale lending was poor as liquidity issues continue to haunt the sector.

"Most large and better-managed NBFCs have upped their on-book liquidity post-September 2018 and carry adequate sanctioned credit and funding lines, with which they could meet the 100% LCR requirement, even after stressing the outflows by 115% and inflows by 75%. Well-managed NBFCs typically maintain 1-2 months' debt repayments and in some case even expected disbursements, in the form of sanctioned undrawn lines, which would support their LCR ratio. NBFCs would have to carry low yielding assets to meet the high-quality liquid assets (HQLA) requirement, going forward, which could exert pressure on their net margins. However, basis their performance over the last two quarters, during which they carried liquid assets in view of the tightened liquidity and were faced with increased cost of borrowings; it was observed that NBFCs were able to partly pass on the increased cost to their borrowers," A M Karthik, vice-president & sector head-financial sector ratings, Icra said in a release.

"However, maintaining HQLA will be some drag on the margin and growth, which is already under pressure due to increase in the cost of borrowing and tightness in the availability of credit post-September 18. Lower rated NBFCs will find it difficult to raise resources under the proposed tight liquidity and ALM management norms, which are very good for the stability of the sector. This might lead to consolidation in highly crowded NBFC space," Karthik said.