The proposed tightening of rules for non-banking financial companies (NBFCs) are very late in coming, and going by the problems the sector is facing, it is surprising the regulators haven’t been more concerned. To be sure, the liquidity mismatches were exacerbated by the IL&FS crisis, which surfaced last August, but the fact is NBFCs have been over-dependent on mutual funds and on short-term borrowings for a long time now. The same is true for some home finance companies (HFCs). Consequently, the rules need to be tightened for HFCs also, with these intermediaries being fully under the oversight of RBI. Should some players need to down the shutters or be merged with bigger companies, to ensure the system isn’t at risk, so be it.
Worryingly, going by the downgrades and caution from ratings agencies, there appears to be more trouble in the works. In late April, CARE Ratings downgraded the instruments of two ADAG companies, pointing out the liquidity profile of the group continues to be under stress on account of delays in raising funds from the asset monetisation plans and impending debt payments.
The point is that financial players, whether banks, NBFCs or HFCs, must have access to resources for tenures that match the tenures of their assets. The abundance of liquidity with mutual funds—partly the result of demonetisation—resulted in NBFCs borrowing from them for short tenures while creating assets that were of a longer duration. The weaker players are now not able to raise funds so easily from the wholesale markets since, post the events at DHFL, lenders to NBFCs are now becoming far more discerning. While, this time around, banks have had adequate liquidity to be able to pick up assets from NBFCs—partly because there is very limited demand for corporate loans—NBFCs should never have been allowed to over-extend themselves in the first place. The pace of growth of NBFC and HFC assets has been way too rapid in the last few years, and while some players have done exceedingly well to ensure the quality of assets is good, others may be in trouble. Indeed, industry experts point out that loans to builders and products such as loans against property are not always in the best interests of the financial system.
For their part, mutual funds should have been far more circumspect while lending to NBFCs. This exposure has been pared to 27% of the assets under management(AUM) from 34% in August last year. However, the concern is that between 4% and 15% of the AUM comprises exposure to stressed players, including IL&FS and Essel Group. Credit Suisse estimates that, of the exposure to four stressed groups that AMCs have, 11% or roughly `2,200 crore is through close-ended plans aggregating `18,000 crore.
Around 56% of this is up for maturity in Q1FY19. Recently, some asset management companies (AMCs) tweaked the maturity dates for some Fixed Maturity Plans, following the delay in repayments by the Essel Group. Should there be any more repayment delays, they would once again be caught on the wrong foot.
There is no doubt that NBFCs play a big role, and painting all of them with the same brush would be wrong. However, the regulators need to watch them much more closely because some promoters are not prudent enough.