NBFCs face higher borrowing costs, slowing profitability, say analysts

Bank lending to NBFCs has grown by 44% , year on year, from Rs 3.4 trn as of August 2017 to Rs 4.9 trn as of August this year

The Reserve Bank of India (RBI) last week announced it would review asset-liability guidelines for non-banking financial companies (NBFCs) because of their rising cost of funding.

RBI Deputy Governor Viral Acharya said over-borrowing through commercial paper (CP) over the past few years and an asset-liability mismatch had led to a “maturity rat race” in the short-term debt market. Concerns surrounding the asset-liability mismatch (ALM) at NBFCs, or raising finance from the short-term debt market while lending to long-term customers or projects, have forced the RBI to step in and implement a correction, say analysts.

“CPs are short-tenure funds and are given at generally low rates compared to long-term borrowing rates. If NBFCs are asked to reduce dependence on short-term borrowing, the cost of funds would go up but the ALM profile should improve,” said Karthik Srinivasan, senior vice-president, ICRA.

Prakash Agarwal, director and head, financial institutions, India Ratings, said: “Given the substantial rise in banking exposure towards NBFCs over the last couple of years, many banks may be approaching their exposure limit in this sector, limiting incremental funding.”

“NBFCs mobilise a substantial portion of funds from banks, many of which are stressed in terms of restricted lending under the Prompt Corrective Action framework, capital constraints and asset quality,” he said. 

This year there was a rise in the amount of CP issuances to Rs6.2 trillion between April and September as compared to Rs3.8 trillion in the last financial year. 

“About two-thirds of these issuances are from financial institutions,” states a report by India Ratings.

Further, the report says the top 12 NBFCs have CP worth about Rs 300 billion due for repayments in the three months ending December this year.

The RBI is stepping in to curb this practice, which has become rampant over the past few years. According to a report by Nomura India, NBFCs pooled 25-30 per cent of their incremental funding from CP. While non-banks like housing or vehicle finance companies have to reduce their dependence on CP for financing, from an investor perspective the valuations that NBFCs have so far received will fall, said Ashutosh Mishra, lead analyst, Reliance Securities.
 

“On the one hand, the high growth of the industry in the past few years will go and there will be a correction in terms of the market premium NBFC stocks have got. On the other hand, bank lending to NBFCs will become rationalised,” Mishra said. 

Bank lending to NBFCs has grown by 44 per cent, year on year, from Rs 3.4 trillion as of August 2017 to Rs 4.9 trillion as of August this year. 

Analysts say rates of long-term loans of banks are 250-350 basis points higher than the rates in the CP market, which is why issuances by NBFCs shot up in the past two to three years. 

“In the past few years, banks may have gone overboard lending to NBFCs, but this will reduce. There will be a correction by which NBFC lending will slow in the near term as they try to manage their liabilities in a better way and in the medium term we will see the momentum pick up again,” he said. 

In a recent report, ICRA stated NBFCs would experience reduced profitability in 2018-19 because of an increase in overall borrowing rates even though these could pass on some of the incremental borrowing cost to customers. 

“You cannot fund long-term assets, even an eight-year housing or vehicle loan, with short-term money and expect to keep rolling over your liability every three months,” said an analyst. 

Asset-liability mismatch
as of March 31(Rs billion)

Company	Lending Book	CP Issuance	Debt:Equity
HDFC	3594.4	429	3.54
Aditya Birla Capital	513.8	6.75	0.09
Bajaj Finance	840	36.83	3.73
PNB Housing Finance	570	104	8.03
Indiabulls Housing	1226	147.5	6.78
DHFL	919	60.5	8.98
Shriram Transport	953	45.5	3.82