A perilous journey ahead for NBFCs: Cheaper funds, slipping credit profile

Non-banking financial companies (NBFC) have started enjoying cheaper cost of funds but at the same time their credit profile is slipping by and rating agencies are warning of a huge pileup of non—performing assets (NPA) in the coming days.

So far, have roughed it since the IL&FS crisis in 2018, but the Covid-19 pandemic crisis has put them in a very difficult spot as banks and markets are hesitant in giving them money. Thankfully, measures taken by the (RBI), such as targeted long-term repo operations (TLTRO) have helped ease the liquidity pressures. The central bank on Wednesday announced operational guidelines for accessing liquidity under a government scheme, but it meant only better rated can enjoy three month liquidity window. There too, it’s more like the investors in bonds will benefit, rather than the themselves.

“A large number of small and medium sized NBFCs continue to face challenges in fund raising as they do not access capital markets but are dependent upon loans from banks and financial institutions,” said Raman Aggarwal, co-chairman of Industry Development Council (FIDC), an NBFC lobby group.

The recent measures by the government and the RBI will help those who issue bonds. But the “need is to cover term loans also,” Aggarwal said, adding, “credit rating being an all-important parameter, it acts as a hindrance to small and medium sized NBFCs, as these companies struggle to obtain even investment grade ratings simply due to their size.”

ALSO READ: NBFCs’ bad loans may worsen to 5-7% this fiscal due to weak economy: Icra

The government’s credit guarantee schemes have not taken off so far, and the small and medium sized NBFCs continue to depend on bank funding for their daily operations. Banks have started lending, but not like before. There is a clear risk aversion, and this may spell trouble once the moratorium period is over. Most banks had refused to extend the moratorium benefit to the NBFCs to start with. Those that managed to avail such a facility, say the repayment will be a problem as the NBFCs themselves have extended moratorium and the liquidity positions are running dry.

For example, Mahindra & Mahindra Financial Services said 75 per cent of its customers have opted for moratorium on EMIs, which has impacted daily cash flow and liquidity. The case for smaller NBFCs are even dire. In most cases, they are at the edge of their cash buffer. And this may eventually lead to some folding up business, or merge with larger ones.

“The NBFC space should see a consolidation of balance sheets going forward, with the business model for smaller NBFCs evolving to an asset-lite originate, underwrite, season and sell model. Life will come full circle for niche players with a strong domain knowledge of asset classes and geographies to focus on their core strength of originating, underwriting and servicing of loans for larger balance sheets,” said Nachiket Naik, head of corporate lending at Arka Fincap.

While downgrading the ratings of Shriram Transport Finance, Bajaj Finance, Manappuram Finance, Hero FinCorp and Muthoot Finance, global rating agency S&P said worsening operating conditions following COVID-19 have increased risks for financial institutions operating in India. “We expect a recession to hurt the financial sector. We expect the asset quality of Indian companies to deteriorate, credit costs to rise, and profitability to decline over the next 12 months,” S&P said.

Similarly, rating agency ICRA on Wednesday said NPAs of non-banks, to touch 5-7 per cent by end of March 2021 compared to 3.3-3.4 per cent in March 2020, assuming a slippage of 5-10 per cent in the assets under management of the shadow banks.

Nevertheless, risk appetite in money markets is coming back.

On Monday, among important NBFC deals in the market, Indiabulls Housing raised Rs 250 crore at 9 per cent for a 18 months maturity, For a similar maturity ECL Finance paid 8.90 per cent to raise Rs crore, for three year maturity, ECL paid 9.75 per cent. Ananya Finance raised three year bonds at 11 per cent, Piramal Capital and Housing Finance raised Rs 325 crore at 8.75 per cent for 2 year 11 months maturity, Satin Credit Care raised money 3 year money at 11.25 per cent, L&T infrastructure Finance raised 10 year bonds at 8.10 per cent.

NBFCs are increasing their issuances in the bond market. In the month of March, NBFCs issued Rs 24,900 crore of bonds, and in April the issuance was Rs 20900 crore. This jumped to Rs 41700 crore in May, but in June the total issuance of bonds was Rs 32400 crore.

The spread between bonds issued by NBFCs, particularly housing finance companies (HFC) are progressively coming down, and NBFCs now are witnessing higher share of incremental credit of the bank loans disbursed. So, in fiscal 2018-19, NBFCs accounted for 15 per cent of banks’ incremental credit. Now that share has increased to 28 per cent in fiscal 2019-20, rating agency ICRA said at a webinar on Wednesday.

Nevertheless, funding challenges will persist for the sector. While the CP rates have moderated substantially, the issuance are going to a select set of entities. External commercial borrowings which supported the funding during FY2020 is also expected to remain muted, it further added.

As far as commercial paper issuances are concerned, it was at Rs 2 trillion by June 2020 and maturities around Rs 1.2 trillion is expected to come up between June 2020 – June 2021.Similarly, bank loan maturities estimated at about Rs 3 trillion is coming for the NBFCs in the current fiscal.

“Increased bank borrowings by larger entities (direct/indirect) could impact the funding flow to the mid and small scaled entities. While the targeted funding initiatives of the RBI and GoI is positive, sustained funding to these entities remain to be seen”, the rating agency said.

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