NBFCs' margin funding book halved

Collateral stocks sold at huge losses as defaults mount.

Non-banking financing companies (NBFCs) owned by leading brokerages and foreign banks are in trouble as they have had to offload stocks lying as collateral with them at huge losses in a plunging market.

Sources familiar with the developments said even on a very conservative estimate the margin funding book of the top 20 NBFCs had nearly halved to less than Rs 2,000 crore from over Rs 4,000 crore in January this year.
 

LOSING GROUND
Index	1-Oct-08	17-Oct-08	Fall since 1-Oct-08
Sensex	13,055.67	9,975.35	23.15%
Mid-cap index	4,824.16	3,544.84	26.51%
Small-cap index	5,606.80	4,167.86	25.55%
Realty index	3,427.21	2,524.89	26.32%

Given the extent of the fall in stock prices since the beginning of this month, almost all small and mid-size company promoters, who had availed of finance by pledging their shares, have defaulted on their payments.

Margin funding is used by investors to take a leveraged position in stocks, while NBFCs raise money through short-term debt placements and bank guarantees to fund these loans. While brokers had stopped lending money to retail investors way back in February this year, they were still extending loans to top-notch company promoters. The companies’ owners pledged their shares with NBFCs to borrow money.

Market players say a majority of the small and mid-size real estate company promoters had each availed of Rs 50-100 crore in loans at 20-25 per cent interest rate to support their falling stock prices. The market capitalisation of such real estate companies has been eroded by over 90 per cent in the nine months since January. The real estate index of the Bombay Stock Exchange (BSE) is down 83 per cent from its peak of 13,848 touched on January 8 this year.

Also, foreign currency convertible bonds (FCCBs) of Indian companies worth Rs1,800 crore would mature in 2009. However, the stock prices are trading at 60-80 per cent below their conversion prices and promoters were borrowing money to halt this free fall in prices.

“There is too little leverage left in the market now as some top corporate houses have borrowed heavily either to subscribe to their rights issues or fund overseas deals, which were committed long back," said a leading Mumbai-based stock broker.

Some of the top foreign NBFCs lending in India are owned by Deutsche Bank, Citi Group, HSBC and Standard Chartered Bank. Motilal Oswal, J M Financial, India Infoline, Enam Securities, Religare and IndiaBulls Securities are among the top domestic lenders.

A senior bank executive said most brokers were going to find it difficult to pay back their loans or raise additional working capital until the liquidity crunch eased.