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Last Updated : Nov 15, 2016 12:18 PM IST | Source: CNBC-TV18

Demonetisation to impact NBFCs for next 3-4 months: Macquarie

In an interview with CNBC-TV18, Suresh Ganapathy of Macquarie Capital Securities said that unsecured loans and consumer durables are likely to see higher non-performing assets (NPAs) in the NBFC sector.


Demonetisation will impact non-banking financial companies (NBFCs) in the next 3-4 months and not in the long run, says Suresh Ganapathy of Macquarie Capital Securities.


In an interview with CNBC-TV18 he said that unsecured loans and consumer durables are likely to see higher non-performing assets (NPAs) in the NBFC sector.


The phenomenal growth seen by NBFCs till now could get impacted for the next 12 months and banks in the real estate sector could face issues as transactions happen here with the help of black money, he added.

Below is the verbatim transcript of Suresh Ganapathy’s interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: Before I ask you about banks which you track very closely, I wanted to ask you more about the NBFCs and the impact it would have. Most NBFCs like Ujjivan have indicated to us that there would be a delay in repayment, a stoppage in disbursements but can you quantify what the damage could be over the next say three to six months?

A: We need to first understand whether this is cyclical or structural in nature. If the repayment culture itself gets significantly affected because of the curtailment of cash, then there is a merit to argue that the losses could be very high. So, once the cash comes back into the system, I think some of the problems could be solved. It is just going to be a momentary impact of about three to four months; that is the initial assessment. However, we really need to see whether this is going to be a long-term structural issue or not, which I don’t think is going to be the case.

Latha: If you can quantify, which segment of the economy are you expecting to be most vulnerable to the dislocation and which segment least vulnerable in the finance space?

A: Clearly the ones which have a larger exposure to the SME sector are the ones who are going to get impacted quite a bit specifically with respect to the banking sector because a lot of SME also thrives well on the success of the parallel economies. So, maybe a lot of public sector banks who have a lot of small and mid-corporate exposures could get affected.

The segment which could be relatively safer would be the usual to be honest the bank kind of lending which they do, the normal mortgage lenders and all those stuff. I don't think there is going to be a big issue on loss given default. There could be an unanimous effect on growth across the sector be it NBFCs or banks, but specifically with respect to losses I think we need to really take into account which segment that they cater to.

So, the cases where there is a lot of unsecured loans, like for example consumer durable loans or personal loans and those kind of segments would have greater losses compared to say a well secured lending like a mortgage lending.

Sonia: If you do believe that this could at best be a three to four month impact especially on some sectors like NBFCs, do you reckon this could be a good buying opportunity especially in names like Ujjivan, Manappuram, Muthoot that have given investors great returns in the past?

A: To be honest, in the near-term, earnings are definitely going to be under pressure. So, I would rather wait for a couple of quarters to see how well the impact is, what could be the level of earnings downgrade by the street and then get into the stocks rather than jump into it. It is too early to jump onto them because I think the impact could be there for a couple of more quarters.

More importantly, I am worried on growth. The asset quality impact could be for a couple quarters and you can recover the money. The growth could get impacted for more than 12 months if the situation just worsens from the current level.

Latha: The real estate sector I would assume is going to be seriously impacted, what will be the in concentric circles, the other sectors that might have a domino impact?

A: The other sectors like cement, paints, tiles, all these sectors which are related to the slowdown in the real estate sector could have a follow on impact. However, the real problem in my opinion more specifically with respect to the real estate sector would be growth for banks because a lot of transactions happens in black in the real estate segment and clearly in my opinion the lack of that black money not being available would have a greater impact on growth rather than asset quality. So, growth is going to be a big challenge at all for all these banks especially also for the NBFCs going ahead.

Latha: What kind of banks would you buy now, would you add any of the PSUs to your list, this is not only a monetisation issue, I am also asking you to take a view on the State Bank of India (SBI) number, Punjab National Bank Numbers (PNB), the Bank of Baroda (BoB) numbers which came over the weekend, any of the top PSUs that would enter your buy list at all?

A: What happens is that people are not understanding the full impact of the monetisation impact. Getting more deposits doesn’t necessarily mean it is going to be beneficial unless and until you find deployment opportunity. Otherwise you are taking deposits at 4-5 percent and then deploying in government securities at 6.5 percent and just getting 1.5 percent spread. That is not going to improve your profitability in a big.

To lend in the market, you need capital, so, the government also needs to give capital. So, clearly deposit mobilisation alone is not going to help. The problem also has been the fact that the provisioning numbers continue to remain very high so SBI numbers may look okay when it comes to slippages but overall profitability was still weak at the consolidated level and provisioning numbers are still very high. So, we still remains very skeptical to be honest about the entire banking system specifically the PSU banks because a) they don’t have the capital to lend and b) they don’t have deployment opportunities in the market and of course provisions continue to remain very high because of asset quality issues. So, avoid all the PSU banks.

I would really book profits at current levels. The best banks to buy in this environment are banks which are going to be least impacted because of all these issues and in fact are only going to take advantage of the weakness in the market and that is banks like HDFC Bank, IndusInd Bank and Yes Bank.

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First Published on Nov 15, 2016 10:56 am
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