Fears of defaults by non-banking finance companies (NBFCs) amid a deepening liquidity crunch gripped the markets on Tuesday as the AAA-rated PNB Housing Finance was put on ‘credit watch with developing implications’ by Care Ratings and following downgrades for two Reliance ADAG companies.
Shares of IFCI, PNB Housing Finance, Reliance Capital, Reliance Home Finance, Edelweiss Financial Services, Dewan Housing Finance (DHFL) and Indiabulls Housing Finance ended between 5% and 11% lower than their previous close. Reliance Home Finance slipped as much as 20% intraday.
The markets opened for the first time on Tuesday since Care Ratings downgraded Reliance Home Finance’s `4,980-crore long-term debt programme to ‘D’, or default grade, and Icra lowered its rating for the company’s commercial paper (CP) programme to A2 from A4.
In a communication to the stock exchanges, PNB Housing Finance said a company being placed under ‘credit watch’ does not immediately imply a likely change in rating. “The rating is put on ‘credit watch’ when any event or deviation from the expected trend has occurred or is expected and additional information is necessary to take rating action,” the financier said, adding that it is looking to maintain its capital adequacy and gearing levels by increasing the share of corporate loans in its book and raising capital.
DHFL said it has repaid interest and principal worth a total `838.47 crore on non-convertible debentures (NCDs) issued on private placement basis.
The week ended April 26 was a particularly difficult one for those looking to raise money as the average liquidity deficit in the banking system, based on net outstanding repo transactions, widened to a nine-week high, according to Care Ratings.
“The tightening of the banking system liquidity at the start of the week can primarily be attributed to the outflows towards tax payments and the high levels of currency in circulation (at `21.9 lakh crore as of April 19, 2.4% higher than that in end-March, 2019) presumably on account of the general elections,” the rating agency said in a report.
Housing finance companies (HFCs) have been particularly susceptible to the impact of the liquidity crisis that first emerged in September 2018 and has persisted ever since. This is because much of their borrowing is in the form of short-term commercial papers (CPs) even as most of their advances are repaid over a much longer period. In a liquidity-starved market, they have had to roll over their borrowings at relatively high yields. Wariness on the part of debt mutual funds, some of whom recently failed to repay investors in fixed maturity plans (FMPs) following partial repayments by the Essel group, has also contributed to liquidity tightness.
Liquidity is likely to remain in deficit mode in the current week as higher market borrowings by the government add to the existing conditions. Month-end government spending and the central bank’s bond purchase of `12,500 crore on May 2 could ease conditions a bit, analysts at Care said.