In the aftermath of default event of large infrastructure financing company in September 2018, the risk aversion of lenders to NBFCs is more important than the actual risk on the latter's balance sheets
The housing finance sector has seen consistent growth of over 20 percent CAGR for over a decade. It is an important sector that revs up growth in real estate and allied industries be it cement, steel, iron, building construction material. Moreover, it also generates substantial labour employment.
In the aftermath of default event of large infrastructure financing company in September 2018, the risk aversion of lenders to NBFCs (largely banks, MFs) is more important than the actual risk on the latter's balance sheets.
The key risk that led to this specific infrastructure NBFC to default was that it deployed short term commercial papers in inordinate proportion to fund long tenured loans. However, it is important to note that comparing an infrastructure NBFC with other NBFC and HFCs is akin to an odious comparison between a cat and tiger. Both are different animals and come under similar taxonomical category—NBFC.
The contagion risk spilled into the entire NBFC/HFC sector has adversely impacted the liquidity. So, for now, both the money supply and cost are constricted as well as expensive.
How do the NBFCs and HFCs cope in the current situation despite having zero track record of defaults in over last few decades? The vacuous space created by the drying up NBFC commercial paper market has created a chasm that doesn’t look like replenishing in a hurry.
Banks have sectoral limits on NBFCs and it currently is peaking. In these times, they would prioritise funding to well-rated NBFCs. In the current environment, most NBFCs and HFCs had to scurry to sell-off the earning assets to banks which had comfortable liquidity positions.
The disbursement by NBFCs and HFCs has virtually come to stand still and is substantially curtailed. This will impact the industry if not quickly addressed for liquidity stagnation has a direct correlation with economic growth.
So what’s the possible way forward for NBFCs and specifically for HFCs then? The game is fast changing. Liabilities now get more respect and attention is on the balance sheet amid credit starvation. It will, therefore, need concerted focus by HFCs to focus on both sides of balance sheets to strike “ tenor matched balance”.
A lack of balance on balance sheet can create risk cascade that could amplify lender’s risk and constrict liquidity further. And this puts to risk 7 percent GDP growth of a $2.2 trillion economy since large parts of real estate will impact the core economy and allied sectors.
The industry has to adjust to the new normal of liquidity deprivation and let this self-created crisis not go waste by perhaps looking at addressing chronic issues of ALM mismatches because any immediate placation looks unlikely.
2019 will be a defining year for HFCs. It will separate the men from the boys. It will be survival of the fittest and players with strong parentage and AUM size will come out stronger. We can classify HFCs in three categories by AUM size—sub Rs 2,500 crore, Rs 2,500-10,000 crore and more than Rs 10,000 crore. HFCs with strong parent backing and above the critical Rs 2,500 crore AUM have a good opportunity to cross over to big league.
The large ones with severe ALM mismatches will go through a consolidation phase and the other ones will have opportunities for growth. The ones below Rs 2,500 crore will lean on collaboration and originate to securitise models to stay afloat during the vagaries.
Sell-downs will become a dominant liabilities strategy as it provides tenor matched funding. The flip side is that it doesn’t allow earning book creation and brings income volatility through upfronting under IND-AS accounting. Two M&As have been announced and more could follow. Banks and non-banking entities have a better opportunity to collaborate through co-lending.
All in all, the liabilities diversification strategy will precede assets bias. Industry will shift to higher ALM compliance and focus on the quality of earning book. Both will be crucial to tide over the hustings. Cash credit limits are likely to be converted to term loans. Non-convertible debentures (NCD) and debt capital markets (DCM) will see more activity.
The government could also consider carving a credible corpus to provide ring-fenced structures to enable pension fund participation. New financial savings products like DLSS (debt linked savings scheme, tax saving scheme with underlying investments in debt ) could be developed which will ensure long tenor funds to mutual funds and therefore to the bond markets.
The author is CEO at Magma Housing Finance.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.