Industry remains sceptical about loans to NBFCs under partial guarantee

Finance Minister Nirmala Sitharaman last Friday gave out tall numbers on how loans worth Rs 20,000 crore to non-banking finance companies (NBFCs) would be approved in the next couple weeks under the partial credit guarantee (PCG) scheme, which has found success in injecting liquidity into NBFCs. Cut to industry opinion, the narrative is different — while it doesn’t disregard these numbers, it apprehends the actual sanctions and benefits to be lower.
 
Scepticism over the quality and value of underlying assets and the scheme, excluding big-ticket loans (or wholesale loans), may remain the barriers in the PCG scheme’s success.  The government last week relaxed the rating requirement of the eligible pool of assets from AA to BBB. But the concern, according to analysts, is that even with AA rating, banks were conducting their due diligence and weren’t ready to accept the quality of assets as presented by NBFCs. Whether the relaxation on rating requirements would move the needle is highly doubtful, they say.
 
“After an internal assessment, banks were marking down the value of assets by at least 30 per cent on the eligible pool of assets under the PCG scheme. They did so to ensure that the asset was good enough to cover losses if they occur, and that banks need not wait until the money comes from the government,” says a banking analyst with a domestic brokerage. Ritika Dua of Elara Capital explains that with risk-aversion in the system not moderating, banks have lately turned more comfortable taking over NBFCs’ complete portfolio, rather than buying assets. “They are unsure how the guarantee would work with the government, in case of losses,” she adds.

The other major concern unaddressed by the PCG scheme which is also hurting NBFCs more in terms of asset quality and growth is the share of wholesale loans or loans to realtors and developers. Non-banks' share of such loans stood at an average of 15 per cent in the September quarter. For some housing financiers, such as Indiabulls Housing, HDFC, and PNB Housing, the shares of developer loans were 17 – 21 per cent, while for Edelweiss and Piramal, these were 27 - 53 per cent. This means that a large chunk of assets that needs support from banks may not find takers, irrespective of their quality. In other words, the PCG scheme limiting the ticket size of eligible loans to Rs 5 crore remains a barrier for wholesale loans to find support under the scheme.
 
“The scheme almost completely shuns the wholesale book, including the developer portfolio, which is the current source of stress among housing financiers and NBFCs. The better-rated retail portfolios (as targeted under the scheme) typically have low non-performing assets (below 10 per cent) and hence, the credit guarantee scheme might further impact the portfolio's return on assets, estimated at 25 basis points, which needs to be serviced to the government as guarantee fee,” say analysts at SBICAP Securities. Also, as the head of a mid-sized housing finance company puts it, NBFCs and banks have found alternative ways of working together, such as co-origination of loans and co-lending practices. “These methods are proving to be a win-win for both as the asset risk and profitability from the transaction are shared between the two,” he explains.

While this may provide some respite, at present, the real concern for the industry is that of growth, which CRISIL estimates would be at sub-12 per cent for the next six-12 months. Besides, NBFCs, including housing financiers, need to rework their asset-liability management practices which may further dampen their financials. With no support on these fronts, the PCG scheme alone may not bring relief to the sector. This is why barring the sector outliers, such as HDFC, Bajaj Finance and, Cholamandalam Investment and Financial Services, interest in NBFC stocks is yet to come back.