NBFCs face tougher times to meet short term repayments in coming months
While most heads of NBFCs do not see a crisis situation as yet, limited access to capital will see short-term pain to meet repayments on debt maturities in November and December.
October 21, 2018 / 13:52 IST
Recap bonds for bank recapitalisation | Acting on its plan announced in October 2017, the central government issued recap bonds worth Rs 88,000 crore in January—the first instalment of committed Rs 2.11 lakh crore. This was prompted by banks that were reeling under NPAs and were short when it came to meeting their capital adequacy and provisioning targets.
Non-banking financial companies (NBFCs) are bracing for tougher times in the coming months to meet funding requirements for making short-term repayments.
While most heads of NBFCs do not see a crisis situation as yet, they suggest that limited access to capital will see short-term pain to meet repayments on debt maturities in November and December.
While NBFCs and HFCs (housing finance companies) are blaming rumours and sudden panic for the adverse market conditions, Moody’s Investors Service in its report pointed out that some of the companies have followed poor liquidity management practices.
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Therefore, under current market conditions, where refinancing and rollovers may not be easy, low liquidity levels will make it tougher to meet short-term repayments.
This comes even as Reserve Bank of India (RBI) and the country's largest lender State Bank of India (SBI) have assured liquidity injection and buying of portfolios from NBFCs.
Moody’s analysis of these companies' liquidity management practices suggested that they are capable of coping with liquidity distress within a one-month period, after which the ability would further weaken.
It pointed out that there is additional stress as a substantial amount of this market debt is short-term in nature and will need to be rolled over.
At the end of March 2018, nearly 38 percent of the debt incurred by NBFCs required refinancing over a 12-month period. "In addition, most of their short-term debt was owed to non-bank sources such as market borrowings, which we associate with a higher risk of not being rolled over compared with borrowings from banks," the ratings agency said.
Meanwhile, Credit Suisse estimated that for the mutual fund industry, both NBFC and HFC investments could have gone up to 35 percent compared to the regulatory sectoral cap of 25 percent.
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Ashish Gupta, Head Research at Credit Suisse said, "A reduction in NBFC/HFC exposure by 10 percent of total debt fund assets, assuming no change to overall industry figure, a total Rs 13,680 crore of run-down in exposure—would require about 2 months, in our analysis."
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