Non-banks have already lost significant market share to banks amid an ongoing crisis of confidence and consequent liquidity crunch
By Mitali Salian
Beleaguered housing finance companies and non-banking financial companies could be unwitting victims of the Reserve Bank of India’s diktat to banks on linking retail and small business floating rate loans to external benchmarks starting next month. Consumers are now likely to borrow from banks as they offer better terms on retail loans, ensuring better transmission of the central bank’s rate cuts.
Non-banks have already lost significant market share to banks amid an ongoing crisis of confidence and consequent liquidity crunch. According to Abhimanyu Sofat, head of research at IIFL Securities: “NBFCs and HFCs have already been losing market share to banks on account of lower disbursals and contending with razor-thin margins owing to higher cost of funds. Yesterday’s announcement will mean further loss of market share. From a business growth perspective, the sector will need more time and help to perform better.”
ICICI Direct Research downgraded LIC Housing Finance and HDFC to ‘reduce’ from ‘hold’ earlier, following the RBI announcement. Kotak Institutional Equities stated that large HFCs such as HDFC, LIC HF and PNB Housing Finance that compete with banks in the retail home loan segment will need to catch up with their banking peers on any movement in home loan rates.
In a note, Kotak stated, “We expect higher NIM volatility for HFCs, after banks migrate retail floating rate loans to external benchmarks. HFCs, may be prompted, over time, to raise more short-term borrowings (or increase interest rate swaps), increase developer loans or expand in segments with lesser competition from banks.”
Incidentally, HFCs and NBFCs, already contending with higher cost of borrowing in the aftermath of defaults by IL&FS and DHFL, face a severe liquidity problem irrespective of credit ratings. Banks remain cautious about lending to the sector with credit risk teams discouraging them from taking excess exposure the sector.
Meanwhile, funding via commercial papers has dried up and the sector has shifted focus to lending through non-convertible debentures, which has resulted in higher supply, forcing the companies to pay more.
Kailash Baheti, chief financial officer at Magma Fincorp pointed out, “Under current circumstances, the debt capital market is going through a confidence deficit and access to raise funds via debt remain largely unavailable.
Funding via commercial paper route was a source of cheaper money and has completely dried up, and this has contributed the most to the rise in cost of funds.
The sector is largely dependent on the banking sector for both replacement and incremental funding. While banks have increased funding to the sector, there is still huge demand supply mismatch and, therefore, cost of funds have remained elevated.”
As Sofat pointed out, the liquidity deficit facing the sector is not owing to lack of liquidity but lack of velocity or movement in money with a large chunk of bank monies lying with stressed assets awaiting recovery under the Insolvency and Bankruptcy Code.
According to market observers, while banks have been lending to NBFCs, these are largely government-backed companies or those supported by a large corporate entity. They also indicated that while mid-sized entities rated BBB/A category have already been facing issues with securing funding, the AA-rated entities are also ‘starting to struggle’. The unavailability of funds to NBFCs and HFCs has also reflected on loan disbursals across most entities that have witnessed dramatic sequential declines for the quarter ended June. Entities that FE spoke with indicated that they were looking to conserve capital to weather the current economic slowdown.
According to data collated from company press releases and Capitaline, at least six HFCs and infrastructure finance companies have witnessed anywhere between a 5%-46% sequential decline in disbursals. According to market participants, HFCs and NBFCs could take well over a year to recover from the ongoing crisis and call for additional support and reforms from the government in line with the partial credit guarantee to PSBs on purchase of high-rated pooled assets from financially sound NBFCs and scheme for co-origination of loans.