Stimulus will keep NBFCs and MFIs afloat, but won't be able to revive them

The relief package announced by Finance Minister Nirmala Sitharaman on Wednesday, including the Rs 30,000-crore special liquidity scheme for non-bank finance companies (NBFCs), housing finance companies (HFCs), and micro-finance institutions (MFIs), is definitely a positive development for non-bank finance companies (NBFCs) given the tight liquidity conditions in the Covid-19-hit economy.

Compared to what we have seen so far, we can say that this package has some ‘relief’ for the sector. That said, we need to wait for all the announcements to come through before judging how each and every announcement will play out.

The FM announced a set of stimulus measures totaling nearly Rs 5.94 trillion to provide relief to micro, small, and medium enterprises (MSMEs); taxpayers; NBFCs; power distribution companies; the real estate sector; organised sector employees; and contractors working with the government.

While these announcements are enough are keep NBFCs, and micro finance institutions (MFIs) afloat in the current environment where working capital is drying up, it won’t revive the sector per se. Those NBFCs, who were unable to make repayments currently or need immediate cash to survive, would benefit from the announcements but we need to see contours of all the announcements before taking the final call.

Consider this: The NBFCs have given loan to a supplier who sees no demand for his/her product. How will the announcements made Wednesday help solve this situation? We don’t know yet! Therefore, it is important to wait for the entire package to come to see if the measures will improve demand in the economy in any manner.

The government backed Rs 30,000-crore liquidity, to be provided by the Reserve Bank of India (RBI) and whose investment are to be made in primary and secondary market transactions in investment-grade debt paper of NBFCs, HFCs, and MFIs, will give public sector banks the confidence to extend loans, even to the smaller NBFCs. Earlier, there was no appetite for debt instruments pertaining to NBFCs which will now see some pick up.

That said, the measures seem to be temporary, as in the long run, banks, especially privately owned, will turn to commercial decision making. While PSBs may still give loans to NBFCs given the support they receive from the government, private banks will continue to be selective in their approach.

Given the fact that most of the private banks have high concentration of retail book, where the stress is likely to aggravate, they will – after a point – focus on their loan books to safeguard their capital. We are yet to see how many loans might turn into non-performing assets (NPAs) in the coming months after the moratorium provided by the RBI is over, hence private banks are expected to stay cautious in their approach.

Given the uncertainty related to demand pick-up, recoveries, and asset quality, banking sector is in for a long haul. The sector may take at least a year, or may be more, to get back to normalcy. Investors, therefore, need to reduce the share of banking stocks in their portfolio and avoid picking stocks for now. My stance on the sector remains cautious.  

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Siddharth Purohit is equity research analyst at SMC Global Securities.

(As told to Nikita Vashisht)