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Despite non-banking financial companies (NBFCs) receiving investments worth over $2 billion from private equity and venture capital funds over the past 3 years, unfavourable market conditions may impact the valuations at which their initial public offers take place, Business Standard reported.
After the crisis at Infrastructure Leasing and Financial Services (IL&FS), NBFCs' business models have changed and so have the market's perceptions of their growth, investment bankers told the news daily. This, they said, will force them to realign their valuations.
This realignment will impact the IPOs of Srei Equipment Finance, Muthoot Microfin and Spandana Sphoorty. The Securities and Exchange Board of India (SEBI) has already approved these IPOs, through which these companies aim to raise a total of Rs 4,200 crore.
There is some pressure on NBFCs' capital, and the Reserve Bank of India (RBI) is set to roll out new norms on their leverage, which makes better performing private banks and small finance banks better bets, a senior banker was quoted as saying.
Small finance banks including Bandhan Bank, Janalaxmi Small Finance Bank and AU Small Finance Bank and select private banks raised $2.5 billion from PEs and VCs, which made investments in NBFCs based on their business models with leverage of over 9 percent of their equity capital.
In the future, analysts believe investors will be more careful while betting on NBFC IPOs. "We expect funding divergence to emerge, and hence, different loan growth rates across strong and weak liability franchises in the near to medium term," Morgan Stanley said in a report.
"NBFCs which are more consumption-oriented are unlikely to have many issues, but those into B2B loans may even face credit risks in their loan portfolio. Investors would need to be wary of such businesses and take a close look at these companies' fundamentals," Anand Shah, Head of Investments and Deputy Chief Executive Officer at BNP Paribas MF, was quoted as saying.
Housing finance companies (HFCs) and NBFCs together had loans totalling Rs 24 lakh crore on their books at the end of FY18, more than double the Rs 11 lakh crore they had in FY13.
Analysts at Prabhudas Liladher said the current liquidity scenario will not let the same growth rate continue. They said NBFCs will have difficulty in getting short-term funding from the markets and will be under refinancing pressures. With the new norms from the central bank, the growth targets for NBFCs will shrink.
Since 100 percent foreign direct investment is allowed in NBFCs, many foreign investors have picked up significant stakes in them.
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