Here's why NBFC stocks may turn into a heap of trouble for investors

NBFCs may be forced to dig into their cash reserves if systemic liquidity support dries up

Stocks of frontline NBFCs such as Bajaj Finance, LIC Housing, M&M Finance, and Cholamandalam Investment have lost 9-12 per cent, as a result of the targeted long-term repo operations (TLTRO) not meeting expectations.

Given that these are NBFCs backed by strong promoters, it reflects the extent of pressure mounting for the sector. Even HDFC wasn’t spared, falling 5 per cent on Friday.

While the first TLTRO worth Rs 25,000 crore launched for well-rated firms was subscribed 4.56x, TLTRO 2.0 of Rs 25,000 crore earmarked for NBFCs was drastically undersubscribed. This implies that when banks could see value in India Inc, the NBFC sector was perhaps in the danger zone.

Suresh Ganapathy of Macquarie Capital says banks are willing to borrow (raise deposits) at 7 per cent and park it with the RBI at 4.4 per cent, thus ready to earn negative spread (or at best a small positive spread of 50-100 bps if savings deposits are included), rather than assume credit risk.

 

 

Therefore, the options left with NBFCs are to either press their case to avail a blanket moratorium (and not selective), or use their cash reserves earned over a period judiciously to repay their dues in the next two months.

Without the moratorium, analysts at JPMorgan say the liquidity problem will remain high and accentuate the asset liability management issue, which took nearly 12 months to be resolved after the ILFS fiasco. As incremental liabilities were raised during this period, largely through bank funding, the failure of TLTRO 2.0 makes stronger the pitch for the moratorium to be extended to NBFCs.

Meanwhile, an Edelweiss report says leading names such as HDFC, LIC Housing, Bajaj Finance, and Shriram Transport have Rs 31,000 crore of non-convertible debentures and commercial papers falling due in April, May and June. 

With cash inflows impacted as NBFCs have extended the moratorium to customers, retiring these liabilities using accumulated cash reserves could alter their capital position.

Adding to this is the issue of credit cost, which brokerages estimate will increase by 30-80 per cent in FY21 to 0.5-8.0 per cent across listed NBFCs.

Even assuming loan growth for NBFCs to be muted in FY21, analysts at UBS expect a pronounced damage to balance sheets. They say NBFCs need not raise capital if credit losses are contained at 5-16 per cent. However, losses exceeding estimates could hit recapitalisation, despite benign valuations.

As banks turn wary of lending to NBFCs, extending the moratorium to them seems the only option. Without this, even if valuations turn more attractive, NBFC stocks may crumble.