NBFCs with shorter-tenure assets better placed to deal with margin worries

Worries over net interest margin (NIM) and balance sheet growth, amid expected challenges in funding growth at reasonable cost, are weighing on the stocks

Stocks of non-banking financial companies (NBFCs) and housing finance companies (HFCs) continued to trade in the red on Monday, for a consecutive session. Stocks of many HFCs fell 5-10 per cent and those of NBFCs by up to eight per cent. Worries over net interest margin (NIM) and balance sheet growth, amid expected challenges in funding growth at a reasonable cost, are weighing on the stocks. Though liquidity is also a problem, analysts do not see this as serious a concern as compared to pressure on NIMs.

After the IL&FS issues, experts believe lenders to NBFCs and HFCs will be more cautious, raising the cost of funds and thus putting pressure on NIMs. Many NBFCs have 37-46 per cent exposure to market borrowing (other than banks); it is higher (53 to 59 per cent) for HFCs. Anil Gupta, head for financial sector ratings at ICRA, expects a 10 basis points (bps) rise in the cost of funds to impact the NIMs of NBFCs, including HFCs, by six to eight bps, depending on their leverage position.

Although the pain would be across the board, players that lend on a short-term or medium-term basis, such as vehicle financiers or gold financiers, are better placed. Being into less competitive businesses, these set of financiers have good capacity to absorb a rising cost of funds (higher yield) and strong pricing power; they can pass on higher cost by increasing their rates. Also, the availability of market funds is relatively easier for these players, safeguarding growth potential.

"Even if NBFCs were to borrow at higher rates in the current environment, those which have relatively shorter tenure assets can afford to borrow short-term (which could be easily available) without creating an asset-liability mismatch, and can easily re-price their assets and liabilities," says ICRA's Gupta.

HFCs are likely to face a tougher situation. First, though many of these have a floating rate of interest on advances, they also have the weak bargaining power to pass on the cost, amid the presence of large public sector and private banks, which offer home loans at a cheaper rate.

Second, the availability of funds from the capital market would be challenging, hampering growth plans. HFCs typically lend for 10-15 years. Hence, they cannot afford to rely heavily on short-tenure funds (asset-liability mismatch). And, amid rising yield and interest rates, capital market participants would avoid investing for the longer term (modified duration is kept lower). Also, equity infusion is not a viable option, as it is costlier than the debt market and lead to a lower return on equity. Moreover, experts believe some rating downgrades, mainly in the HFC space, has added to the worries on account of both NIMs and growth.

This scenario augurs well for banks. Given the issues that HFCs face, they can take market share in this business. Or get better yields on loans to NBFCs and HFCs. "With the continuing reluctance to fund NBFCs/HFCs, the switch from capital market borrowing to bank borrowing would be rapid," analysts at Emkay said in a recent note.

Overall, it would be interesting to see how the growth transition between banks, NBFCs and HFCs plays out in the near term. Investors with high-risk appetite could selectively take bets, even if these share price corrections look attractive for bottom-fishing.