Left out in the cold: With no support, NBFCs likely to be in a bind

Non-banking financial companies may well face a second wave of liquidity problems after the loan moratorium is lifted, writes Raghu Mohan

Should the time-frame for provisioning for bad loans be extended to 180 days from 90 days?” asks Ravi Subramanian, managing director and chief executive officer (CEO) of Shriram Housing Finance, before going on to add, “I will answer that question at the end of this month.” He explains: “When an economy contracts by 9-15 per cent, there will be repercussions.

One may therefore look at differential provisioning — not the 90-days past due norm across segments.” 
 

Now, what could unfold at the systemic level, going forward? Could a second cash crunch be looming for India’s non-banking financial companies (NBFCs), like the one that occurred after Infrastructure Leasing & Financial Services defaulted on payments to lenders in September 2018 (perhaps not of the same magnitude, though)?
 

An analysis by the Reserve Bank of India’s (RBI’s) Financial Stability Report (FSR) of June 2020 shows that at the end of April, 29 per cent of NBFCs’ customers and 49 per cent of their outstanding loans were under moratorium. These numbers were higher for banks: 55.1 per cent and 50 per cent (but this is because it is inclusive of their exposures to NBFCs as well). There is another data-set: debt issuances of Rs 30,495 crore in May 2020, with outflows (on account of maturing papers) at Rs 30,633 crore. Data for issuances in the subsequent months could anyway not have been captured in the FSR of June, as its finalisation was in the last lap. But outflows were projected at Rs 38,117 crore in June, Rs 22,243 crore in July, Rs 34,171 crore in August and Rs 18,750 crore in September.

 

The assets under moratorium of NBFCs and housing finance companies (HFCs) are dominated by wholesale customers and real-estate developers, although retail portfolios in the micro-loan and auto-loan segments have been affected as well. “Access to capital markets — both debt and equity — is of significant importance,” the FSR observed.
 

Making sense of the math
 

NBFCs are expected to provide a breather to their clientele, but are not eligible to get a loan-recast from banks. How is one to make sense of this? The answer depends on who you seek out; it’s a divided house, though the collective view is that there will be pain.
 

“We should be eligible for a recast from lenders, especially if the loans provided by us to various borrowers are also to be restructured. This would avoid a liquidity mismatch. NBFCs have been one of the key providers of credit to micro, small and medium enterprises (MSMEs) in recent years,” says Vimal Bhandari, executive vice-chairman and CEO at Arka Fincap.

 

Shachindra Nath, executive chairman and managing director of UGRO Capital, looks at it differently. “We have to appreciate that most NBFCs over the years have been running an asset-liability mismatch, and the benefit of restructuring of their debt from banks could be misused for managing this inherent mismatch. Given that other liquidity windows have been provided for NBFCs, my personal opinion is that this lack of loan recasts should not pose a challenge. This might hinder their growth, but should not pose any systemic challenge,” he notes.
 

Nath is backed by Gunit Chadha, founder of APAC Financial Services: “NBFCs backed by their institutionalised structure and operating metrics are much better equipped to handle the situation, as compared to individuals or MSMEs.” He points to measures taken by the central bank, such as long-term repo operations and support on securitisation, which, he says, “were well utilised by the larger NBFCs.” He concedes, however, that “it’s the smaller NBFCs and fintechs which need more liquidity support.”
 

There is also a more hawkish position doing the rounds that few are willing to go public with. To the extent that banks cannot restructure their liabilities (deposits), why should NBFCs press for such treatment, and hope to be a recipient of it? “This line of thinking would have been valid if the banking regulator had not asked banks to give a moratorium on their loans to NBFCs. You can’t cherry-pick on our concerns like this,” complains the CEO of an NBFC.
 

According to Crisil Ratings, while there has been an improvement across segments over the past four months, collections in the wholesale, MSME and unsecured segments are still much lower than before the pandemic. “Now that the moratorium has ended, self-employed borrowers are likely to be impacted more because of slow resumption of economic activity and continued local restrictions,” says Krishnan Sitaraman, senior director at the ratings agency.

 

What one can be reasonably certain of is that, going forward, many NBFCs will be in a bind.
 

Will there be a logjam ahead?
 

The gross non-performing assets of NBFCs declined during successive quarters until Q3FY19, but surged in Q4FY20 (See chart: NBFCs’ asset quality & CRAR). The fall in market funding for NBFCs can increase liquidity risk for both themselves and for the financial system. The RBI’s Financial Stability Report (FSR) of June 2020 says that the smaller, mid-sized, and AA or lower-rated (or unrated) NBFCs have been given the cold shoulder by both banks and markets. The FSR is candid: “The liquidity tensions faced by NBFCs was also reflected in the lacklustre response to the Targeted Long-Term Repo Operations 2.0.”