Stricter asset-liability management rule worry drags NBFC stocks down

In addition to higher costs, the Street is worried about fall in credit growth

The Reserve Bank of India’s (RBI) monetary policy, announced on Friday, looked positive for non-banking financial companies (NBFCs), including housing finance companies, as the apex bank kept policy rates unchanged. 

Despite this, investors dumped NBFC stocks, most of which declined by up to 8 per cent on Friday.

This is because members of the monetary policy committee were unhappy with NBFCs’ reliance on cheaper short-term commercial papers for funding long-term assets (asset-liability mismatch). The share of commercial papers in the total debt funds invested by mutual funds in NBFCs zoomed from 41 per cent in FY16 to 47 per cent in FY18 and further to 58 per cent in August 2018.

According to RBI Deputy Governor Viral Acharya, increasing asset-liability mismatch can be a particularly imprudent policy in times of global and domestic tightening. He urged the sector to shift to sources of long-term funding such as equity. Moreover, deputy governor N Vishwanathan, too, talked about strengthening the asset-liability guidelines so that roll-over risk can be avoided.

Many market experts expect stricter asset-liability management guidelines by the regulator in the next 2-3 weeks. This would hurt NBFCs performance in the near term. First, shift to long-term funding would add to the cost of funds of NBFCs, impacting near-term profitability. Second, it could be tough for NBFCs to arrange long-term funds amid debt market pressure, thus taking a toll on credit growth.

“Market participants are reluctant to invest for longer tenure amid rising bond yields, which will lead to mark-to-market losses,” said Anil Gupta, head-financial sector ratings at ICRA. Acharya, during an analyst call, also indicated that credit growth could slow down during the shift from short-term funding to long-term ones.

In fact, after the monetary policy outcome, experts said debt market pressure will intensify. Even if banks seem to be good option for NBFCs, analysts believe amid high volatility, banks may also increase their lending rates for NBFCs. But some experts believe that the stringent asset-liability management guidelines will not come immediately given the tight financial environment.

Investors have been told to avoid NBFC stocks till there is some clarity and valuations correct further.