Non-banking financial companies may not benefit from the portfolio buyouts by banks. Instead, the 'help' may just worsen their growth prospects, said a representative of the non-banking financial sector.
“Banks buying NBFC portfolios may provide immediate liquidity but this is not the desired solution as it will only reduce the book size of the NBFCs. The companies need long-term support by way of refinance,” said Raman Aggarwal, Chairman, Finance Industry Development Council (FIDC), a self-regulatory organisation for NBFCs.
For now, most banks including State Bank of India (SBI) have assured support by being open to buying more portfolios from NBFCs to address their liquidity issues. SBI said it has an opportunity to buy up to Rs 45,000 crore (including its previous plan to buy Rs 15,000 crore).
Although most banks said they did not see any major concerns and continue to lend to the NBFC sector, many of them are looking at the situation as an opportunity to grow their own market share, now with a better pricing power.
The NBFC body has also written to the government and RBI in this regard and has been assured of support but is yet to hear anything formally from the two institutions.
Apart from liquidity issues, at present, the NBFC industry is also grappling with concerns around the recovery of cash flow in their business. Some banks have also withdrawn their already-sanctioned limits to curtail further financing due to fears of them defaulting.
This comes at a time when about Rs 2 lakh crore of debt from the non-bank lenders is due for redemption or roll over by the end of December 2018, as per the Department of Economic Affairs (DEA).
In a letter on October 26, the department said there are fears of “significant default” from large NBFCs and housing finance companies (HFCs) in the next six weeks if additional liquidity support is not forthcoming.
The department estimates a funding gap of as much as Rs 1 lakh crore by the end of the year if the pace of fundraising seen in the first half of October (about Rs 20,000 crore or 68 percent lower than the same period in August) is sustained.
A further Rs 2.7 lakh crore of commercial paper and non-convertible debentures will be due for redemption over January -March 2019, the letter said.
Push from Mudra
Aggarwal said there is a need for the Mudra (micro units development and refinance agency) scheme to actively take up refinancing of small and medium NBFCs for whom refinance is the only mode of funding.
“Currently, Mudra's exposure to NBFCs is negligible and the Finance Minister had assured in his budget speech this year that norms for availing refinance by NBFCs from Mudra shall be relooked. This is the crying need of the hour for a large number of small and medium NBFCs,” he said.
A typical NBFC model is short-term lending with an average of 2 to 4 years with small ticket size lent to small businesses.
As per reports by Edelweiss and ICRA ratings agency, more than Rs 31,000 crore of commercial papers (CPs) has been redeemed in the first three days of November. Of these, nearly Rs 16,000 crore were redeemed on Monday alone including Dewan Housing Finance Corporation Ltd’s (DHFL) Rs 1,775-crore paper.
NBFCs (including HFCs) have accounted for around 55-60 percent of bond issuances during the last 2-3 years and approximately 41 percent of CPs outstanding as on September 30, 2018, said another ICRA report.
The fears of default were followed by the first default by the non-bank infrastructure conglomerate IL&FS (Infrastructure Leasing and Financial Services) that took place in early September.
Aggarwal said it is very important not to club NBFCs with housing finance companies (HFCs). “The whole issue of asset liability mismatch may be relevant for long-term financing players like HFCs,” he said.
The fears have been echoed in Delhi too.
Corporate Affairs Secretary Injeti Srinivas, while talking to journalists on November 5, said, “It is basically a segment of NBFCs and HFCs which are facing liquidity problems. It is more pronounced there. I will not get into individual names. It’s a segmental problem. These are big entities part of that segment.”
In addition, a weaker rupee and a higher oil price worsened the repayment capacity for the non-banking lenders.
“At a macro level, some measures have been taken. This situation should ease but at the same time...the way business is conducted by this sector, they will have to deeply introspect and adopt the model which is sustainable and takes into account sources of funds, deploy them to minimise this mismatch,” Srinivas added.
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