High net worth individuals (HNIs) and ultra HNIs could have to come to the rescue of non-banking financial companies (NBFCs), which are facing a severe liquidity crunch.
High net worth individuals (HNIs) and ultra HNIs could have to come to the rescue of non-banking financial companies (NBFCs), which are facing a severe liquidity crunch. In the first quarter of the current financial year, financial services companies have raised around Rs 3,700 crore through market-linked debentures (MLDs). CARE Ratings estimates MLD issuances to grow to around Rs 17,000 crore in this fiscal against Rs 12,246 crore a year ago.
MLDs are of two types — principal protected (PP) and non-principal protected (NPP). An investor’s inclination towards downside protection continued to support the principal protected MLDs. Such MLDs accounted for approximately 95% of the total issuances in the April-June period this year. The tenure of these MLDs ranges between 18 and 60 months, depending upon issuers funding requirement. “The average maturity of MLDs issued has been 2.89 years in FY19 against the average maturity of 2.92 years in FY18,” CARE Ratings said.
Karvy Private Wealth’s head of research and international products Sabyasachi Mukherjee said: “MLDs are a win-win situation for both issuers as well as investors. While for the issuer, there are bullet payments for such MLDs that are paid at end of the maturity, in case of NCDs they have to pay annual or monthly coupon payments. From the investors’ point of view, it gives them better returns and they can participate without losing the capital.”
Market participants also say most of the HNIs invest only in the ‘AAA’ rated issuances, but in recent days, several ‘AA’ rated issuances have also seen interest from investors due to the higher yields.
CARE stated that the average monthly borrowing via PP-MLDs is expected to rise to approximately Rs 1,300 crore in FY20 from approximately Rs 1,000 crore in FY19.
“Apart from the existing issuers such as Aditya Birla Finance, Tata Capital Financial Services, L&T Finance group, Mahindra & Mahindra Finance and Hinduja Leyland Finance India, new issuers such as Shriram Transport Finance, Tata Cleantech Capital and Ashirvad Micro Finance issued MLD structures with G-Sec as underlying reference index during Q1FY20,” CARE said in its report.
Seven new companies including NBFCs, housing finance companies (HFCs) and micro finance institutions (MFIs) have resorted to raising long-term funds from the capital market in the form of MLDs.
Motilal Oswal Private Wealth Management’s head-investment advisory Ashish Shanker said: “Basically, quality NBFCs are directly accessing HNIs because the corporate funds market have dried up. Banks and MFs have become averse to lending due to the crises in the NBFC sector. MLDs help HNIs register better returns compared with other fixed income products.”