NBFCs in repair, rebuild and recalibrate mode as funds position improves

While the availability of funds has improved, analysts remain cautious on the sector, given growth and profitability concerns

A year ago when the liquidity bear hugged the financial system, just a handful expected it to have a lasting impact on non-banking financial companies (NBFCs). But the victims of tight money supply are cropping up with every passing month, the latest being foreign funds-backed Altico Capital. While in size it may not be material, the default did have a contagion effect on listed NBFC stocks on Friday, with the pack falling 2–3 per cent in an otherwise good trading session. The larger view, though, is that incidents such as Altico or Dewan Housing may just be exceptions as the situation for the larger listed entities is on the mend.

R Sivakumar — head, fixed income, Axis Mutual Fund and also one of the few who called the liquidity crisis capable of being a scathing one even a year back — says the good news is that the number of NBFCs struggling to raise capital has reduced. “There is domestic and foreign capital available for the system today and the tightest phase of capital is behind us,” he says. Agreeing with Sivakumar, Pankaj Naik, associate director, India Rating and Research, says the quantum of the challenge is less, especially for those backed by better pedigree. Yet, there is little or no exuberance on better capital availability. For one, Naik cautions that the environment remains challenging for all. More importantly, how the two key aspects for the industry — the cost of funds and loan growth opportunities— are going to shape up in the next year remain points of concern.

This is why experts say even if FY20 could be less challenging from a liquidity perspective, it will be a year of repair and recalibration of business for NBFCs. Also, while funds are readily available, their costs have proportionately risen. In the June quarter (Q1), the marginal or incremental cost of funds rose by 30–70 basis points across NBFCs, which prompts Naik to comment that the days of expensive capital may be here to stay. “Even those with good parentage have been able to raise capital but only at a higher price.” Sivakumar thinks differently. Some NBFCs, according to him, have been able to grow faster than the system and the markets have given higher weightage amid a flight to safety helping them access money at competitive rates.

Going ahead, at what point cost of funds would ease for the system would be a function of how fast banks transmit their lower cost of funds to its borrowers. While some of the well-rated companies are beginning to benefit from easing interest rates, corporates, which are lower down the rating ladder, may take a while to benefit.

Also, at what cost NBFCs would be willing to borrow depends on avenues of deployment ahead of them. “Even as asset-liability management was better in March 2019 compared to a year ago, the focus is on conserving capital,” says Naik. “Asset side indicators don’t show much improvement,” he adds. Depressed consumer sentiment and some of the key consumption pockets such as cars, two-wheelers, and commercial vehicles going through a prolonged slowdown don’t augur well for NBFCs. This may, in turn, put a cap on the ability of firms to pass on the high cost of borrowing to their customers, a point that was quite pronounced even in Q1.

Finally, even as rating review depends on various parameters, including profitability, asset quality, and growth, any deterioration on these parameters could make the sector vulnerable to further rating downgrades. This again could impair their ability to raise capital.

Therefore, the worst may be behind NBFC stocks. Yet, analysts advise investors to remain on the sidelines for six-nine months. Brokerages, including Nomura, Credit Suisse, Morgan Stanley, and CLSA, have an extremely cautious view on the sector, though stocks such as HDFC and Bajaj Finance are the names that the Street remains comfortable with.