In light of liquidity challenges and concern in wholesale NBFCs, we remain cautious on the sector even as stable asset quality in most retail segments, detailed in RBI’s FSR, reinforces comfort on retail players.
Mutual Funds’ current exposure to NBFC/HFCs at 28% is broadly in line with the revised cap prescribed by Sebi. However, lower sectoral limit will affect medium-term financial flexibility of all NBFCs. MF/debt investors are anyway cautious, preferring retail NBFCs with strong parentage; most NBFCs have anyway increased bank borrowings. In light of liquidity challenges and concern in wholesale NBFCs, we remain cautious on the sector even as stable asset quality in most retail segments, detailed in RBI’s FSR, reinforces comfort on retail players.
Sebi has reduced sectoral limits for mutual funds’ investment in any single sector to 20% from 25% earlier. This will directly affect their investments in NBFCs. The regulator has also reduced the additional exposure limit on HFCs to 10% from 15% earlier. It has, however, provided for added 5% limit for securitised debt backed by retail housing loans and affordable housing loan portfolios. Currently, the total cap for MFs to non-banks is 40% which includes 25% to NBFCs and 15% to HFC. This will now stand reduced to 30% (20% to NBFCs and 10% to HFCs) with an additional 5% for retail/affordable housing securitised loans. The timeline for implementation of this regulation is not clear. Sebi has also mandated investments only in listed NCDs (which is mostly the case) and listed CPs. This norm will, however, be implemented in a phased manner.
The ratio declined to 36% in May 2019 from 39% in September 2018. Excluding PFC/REC, the ratio was 28% in May 2019, in line with the new effective cap of 30%. Within this, the exposure to NBFCs was 18% and HFCs was marginally higher than the new cap at 11%. While it may seem that these norms may not have an immediate impact, we believe these significantly reduce the financial flexibility of NBFCs. NBFCs make concerted efforts to diversify funding avenues from banks to MFs, insurance companies, foreign borrowings, retail bonds, etc, in order to optimise funding costs as well as reduce dependence on any single source. The new regulations will structure reduce the leeway for NBFCs especially in the backdrop of the recent Sebi regulation that prescribed large borrowers to raise 25% of incremental borrowings from bond markets from FY22.