MF funding to NBFCs falls to 18-month low of Rs 86,779 crore in June

The funding challenges for non-banking financial companies (NBFCs) continued to get more intense with mutual funds' (MFs') deployment towards the short-term debt market of NBFCs dropping by another 15 per cent to Rs 86,779 crore in June. 

Data sourced from the Securities and Exchange Board of India (Sebi) showed that fund deployment was the lowest in 18 months.

The recent announcements made in the Budget and the indirect liquidity window given by the Reserve Bank of India (RBI) have failed to improve investor sentiment on NBFCs. “These measures have brought some stability at the systemic level, which can be seen from the easing of funding rates. But market reluctance in extending funds to NBFCs continues to persist,” said Mahendra Jajoo, head-fixed income at Mirae AMC.  

The Budget proposed providing a one-time six months of partial credit guarantee to public sector banks (PSBs) for first loss of upto 10 per cent. This measure was proposed to encourage PSBs to buy high-rated pooled assets of up to Rs 1 trillion of financially-sound NBFCs. The RBI also tweaked bond holding norms of banks, which could allow banks to borrow an additional Rs 1.3 trillion for buying pooled assets, thereby providing liquidity support to NBFCs.

Experts said while market perception on NBFCs remains weak, new valuation norms for liquid schemes have also contributed to the fall in MF funding.

“The liquid fund category has been one of the major sources of funding for NBFCs. But, with Sebi reducing the threshold for mark-to-market to over 30-days, from over 60-days, MFs have been curbing their exposures to the NBFCs, which participated in this segment of the market,” said Dwijendra Srivastava, chief investment officer (fixed income), Sundaram MF.

Recently, Sebi stated that all securities held in liquid funds – irrespective of maturity – would be marked-to-market. Industry officials added that the move is likely to make liquid funds more volatile in terms of returns, which could trigger investor outflows. “If liquid funds see slowdown in flows, it would also have a bearing on MF funding towards NBFCs,” said a fund manager, requesting anonymity.

In June, liquid funds saw an outflow of Rs 1.5 trillion, which was partially on account of the change in valuation norms. “Bulk of the outflows were the result of large-ticket investors taking out money to meet their advance tax requirements at the end of the quarter,” the fund manager added.

Experts said that it is difficult to take a call on NBFCs, given their large loan book and lumpy assets, including developer loans. 

“Influx of liquidity from MFs and other institutions helped NBFCs scale up their loan book. Lack of liquidity can make some of the NBFCs belly-up, as large-sized borrowers are also facing stress due to the liquidity crunch,” said a senior executive of a fund house.