NBFCs are a high-risk bet now; bottom-fishing here is fraught with risks

Asset-liability management, ability to quickly pass of high cost of funds and recovery capacity in worst case scenario are key issues

Do non-banking financial companies (NBFCs) and housing finance companies (NFCs) offer good entry points at recent dips post Friday’s free-fall? Well, investors should consider some key points before bottom fishing in these stocks.

Friday’s fall was not on account of systematic crisis or any fundamental concerns on part of these packs, say experts. Liquidity and profitability concerns weighed on these two packs. Thus, asset-liability management (ALM) is critical to understand. For HFCs, ALM becomes more serious as they lend for longer term say 10 or 15 years. “There is asset-liability mismatch risk in NBFCs and mainly housing finance space. Players, which borrow at short-term for long-term lending are at risk, says Sunil Jain, head of research at Nirmal Bang.

Apart from ALM, ability or how fast companies pass on rising cost of funds is also important when interest rate is rising and bond market is too under pressure. In this regard, short or medium term financiers, within the NBFC space, stand out. “Short-term financiers like gold and vehicle financiers are good bet as they have lower risk of margin pressure,” Jain added. Though HFCs have longer tenure loans, some might have reset clause (periodicity of revising interest rate) could save them.

However, in the worst case scenario in the short-term HFCs are the safe haven as their collateral value normally is not volatile in short-term. "Compared to assets of housing finance companies, vehicle financiers are exposed to the risk of depreciation in the collateral value. Realisable value of hypothecated assets will be lower than the amount lent," says G Chokkalingam, managing director and founder at Equinomics and Research. "HFCs are relatively safe unless there is any macro economy crisis," he added.

Overall, only investors with an appetite for higher risk should bottom fish on very selective basis till we get more clarity.