NBFCs’ loan funds grow even as cry for liquidity turns louder

PK Dey
Posted: Sunday, Mar 15, 2009 at 2325 hrs IST
Updated: Sunday, Mar 15, 2009 at 2325 hrs IST

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Mumbai: Despite the liquidity crisis, the growth of loan funds of 397 non-banking finance companies, including term lending institutions, increased from 21.53% during 2006-07 to 25.68% during 2007-08. And the total debt of these NBFCs increased from Rs 2.49 lakh crore in 2005-06 to Rs 3.03 lakh crore in 2006-07, and further increased to Rs 3.81 lakh crore in 2007-08.

The net worth of the NBFCs steadily increased from Rs 52,966 crore in 2005-06 to Rs 95,902 crore in 2007-08 after reaching a level of Rs 68,370 crore in 2006-07. So, the debt-equity ratio ( D/E ratio) of the these 397 NBFCs decreased from 4.71 in 2005-06 to 3.97 in 2007-08.

The D/E ratio normally helps assess the extent to which the company is using borrowed money. It is simply obtained by dividing the total debt (total loan funds) of the company by its share holders equity (net worth).

The D/E ratio is an important tool of financial analysis to apprise the financial structure of the company. It indicates the relative claims of the creditors and shareholders against the capital employed by the company.

Among 397 NBFCs, 201 NBFCs saw an increase in the D/E ratio, while 161 witnessed a fall in the three years under consideration. The remaining 35 NBFCs’ ratios were same for both the years.

An analyst from a rating agency said, “Credit expansion of banks has grown in 2007-08 as compared to 2005-06 due to healthy growth of the economy. This is reflected by overall growth in debt of NBFCs. But the debt-equity ratio decreased due to moderate borrowing from the banks by NBFCs as compared to raising their own funds as well as ploughing back internal cash generations.”

In 2007-08, two major companies - LIC Housing Finance and IL&FS Financial - had ratios of eleven or more.

NBFCs that had a very low D/E ratio in 2007-08 were Reliance Capital and Kotak Securities.

A significant increase in the D/E ratio was noticed in the case of Shriram Transport, Cholamandalam DB, Magma Fincorp, GE Cap and ICICI Securities. NBFCs that saw a sharp decrease in the D/E ratio were HDFC, ILFS and GIC Housing Finance.

In terms of debt, the top five NBFCs during 2007-08 are HDFC, Power Finance Corporation, Rural Electric Corporation, Indian Railway Finance Corporation and IDFC. Among these, highest D/E was registered in the case of Indian Railway Finance Corporation (9.93).

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