Can The Non-Banking Finance Sector Be Nursed Back To Health?

The impact of the recent default of Infrastructure Leasing and Financial Services (IL&FS) has had a ‘ripple’ effect at not just the non-banking finance sector (NBFC) but also across the broader financial sector including the stock market and the debt market. The cascading impact also manifested itself with the Reserve Bank of India (RBI) recently announcing several steps to improve the liquidity position/funds availability for NBFCs and housing finance companies-related institutions, and to bring stability to the financial system.

IL&FS had consolidated long-term borrowings that amounted to Rs 65,293.5 crore at the end of March 2018, a rise of 9.3 per cent year-on-year. Also, short-term borrowings of IL&FS on a standalone basis, which gives a rather limited picture of the company, amounted to Rs 3,371.4 crore for the year ended in March 2018, a rise of nearly 158 per cent from a year earlier.

The impact of the above default is visible. IndusInd Bank, which declared its September 2018 quarter results on 15 October, had made a provisioning of Rs 275 crore for the said quarter related to IL&FS, and as a result, its quarterly profit barely grew 4.5 per cent year-on-year. The above provisioning is related to earlier lending to the bankrupt IL&FS.

It does not end there. Debt fund schemes of mutual funds also witnessed large withdrawals in September 2018, with liquid/money market funds witnessing redemptions of nearly Rs 2.11 lakh crore, according to the industry body Association of Mutual Funds of India (AMFI). The above is attributed to corporates and high net worth individuals attempting to improve their fund availability position in the current difficult environment.

Woes Of NBFCs

In the case of NBFCs, analysts at leading brokerage houses tracking the sector, highlight several factors for the deterioration in the operating environment for players in this sector. And an important cause relates to asset-liability mismatches of NBFCs. The above broadly refers to mismatches, in terms of loans, like home loans given by NBFCs to families/individuals that can vary in duration from say three years to 20 years.

Meanwhile, NBFCs accept deposits from the public and also borrow from banks in the form of loans, broadly in duration from six months to 10 years. In addition, debt fund schemes of mutual funds also invest in debt instruments of NBFCs.

Banks typically provide 40-55 per cent of the funding requirement of NBFCs, and mutual funds provide about 10-20 per cent. Analysts highlight recent large withdrawals from debt schemes of mutual funds post the IL&FS default along with asset-liability mismatch of NBFCs, which in turn has led to the current liquidity crunch in the beleaguered NBFC sector.

In a bid to support the financial system, the RBI had recently announced incentives for banks to lend to NBFCs and housing finance companies, and as per analyst estimates nearly Rs 59,000 crore of bank credit is expected to be available to these players in the short term.

The central government, too, in early October appointed a new board for IL&FS led by Uday Kotak, and they are attempting to put a rescue plan in place for this beleaguered NBFC via asset sales. IL&FS had grappled with an increase in funding requirement for various group ventures over the year, coupled with delays in settlement of claims of nearly Rs 9,000 crore.

Meanwhile, in the case of other leading players, like Repco Home Finance, in its annual report for the year ended March 2018, it has highlighted that on a standalone basis that it has borrowings from banks (including NHB) of Rs 1,810.79 crore along with market borrowings of Rs 555 crore with a maturity profile of over one year and less than three years. NHB refers to the regulator for companies providing home loans.

At the same time, Repco Home Finance has advances in the form of loans of just Rs 1,430 crore in the above maturity profile (Source – Asset Liability Management: Maturity pattern of certain items of assets and liabilities in Repco Home Finance’s annual report for March 2018).

The above could create a difficult financial situation for this player in the medium term and it would need to boost its fund inflows/availability, say financial analysts. An emailed questionnaire sent to Repco Home Finance went unanswered.

Similarly, Dewan Housing Finance Corporation, had highlighted liabilities for year ended in March 2018 (consisting of deposits, borrowing from banks, market borrowing and foreign currency liabilities) of Rs 31,146 crore with a maturity profile of over one year and less than three years (Source - Assets Liability Management in DHFC’s annual report for March 2018). At the same time, this company had assets of Rs 12,372.8 crore with the above maturity profile. An emailed questionnaire sent to Dewan Housing Finance Corporation also went unanswered.

On the stock market, too, NBFC-related stocks have seen sharp falls owing to nervous investors. For instance, Dewan Housing Finance Corporation, ended Wednesday’s (24 October) trade at Rs 190.2, barely higher than its 52-week low of Rs 179 reached on 23 October 2018. The stock has fallen nearly 72 per cent from its 52-week high of Rs 690 reached on 3 September 2018. Similarly, Repco Home Finance ended Wednesday’s trade at Rs 349, and it has fallen nearly 54 per cent from its 52-week high of Rs 739 reached on 8 September 2018.

Investors, especially the foreign institutional ones, fear that the impact of the troubled NBFC sector may spill over to the broader economy, and the S&P BSE Mid-Cap Index has dropped nearly 24 per cent since the peak reached in early January 2018.

It does appear that the current flux in the NBFC sector will take some time to settle down.