As top 50 non-banking finance companies need Rs 950 billion to repay debts, of which Rs 700 billion are commercial papers maturing this month, banks will have to lend more to the sector to avoid defaults, says a report.
Since the IL&FS defaults, it can be noted that NBFCs and housing finance companies (HFCs) were facing a crisis of confidence, sending call money rates higher and overall liquidity tight. This forced RBI to open a special window for banks but denied the same to NBFCs and also announce Rs 360 billion of OMO purchase in October and Rs 400 billion in November, which has brought in some sanity to system.
The crisis of confidence comes even as asset quality of NBFCs is largely steady.
"As many as 50 large NBFCs have debt repayments worth Rs 950 billion due in November, of which, Rs 700 billion are commercial papers (CPs) maturing," said Krishnan Sitaraman, a senior director at the agency, adding some of them are well- placed to meet the debt repayments without drawing down on bank lines, others may have to do so, at least partially.
The report, however, did not say how much of short- tenor debt is due this month at the industry level. But media reports last week had pegged the system-wide redemption of Rs 600 billion between November 1 and 9 alone.
In October, the rollover rate of CPs issued by these 50 largest NBFCs was only around 40 per cent of the average monthly issuances between June and August 2018. Consequently, NBFCs were forced to tap banks for funds.
In the past, issuances by financial sector entities have typically been fully rolled over or refinanced on maturity. Nevertheless, CP volumes have increased in the last week of October and if the trend continues, rollover rates should be higher in November.
Commercial paper or CPs are short-term debt with one to three months maturity.
"NBFCs with strong parentage and those belonging to large corporate groups have managed to partially roll over their CPs and raise funds from banks to a greater extent compared with peers, although they have had to pay higher interest rates," said Sitaraman.
"Selective lending by mutual funds means in the weeks ahead, continued and times access to bank funding will be critical for NBFCs," he added.
Though most NBFCs have adequate liquidity buffer in the form of cash/cash equivalents, and sanctioned unutilised bank lines to manage mismatches in their asset-liability maturity profiles, in the past one month, some of them have found it tough to quickly drawdown on bank lines, which led to some liquidity stress.
On top of it, market sentiment continues for select NBFCs, which are into housing finance and wholesale lending, forcing them to the securitisation market to get liquidity.
Another funding avenue gaining traction is retail bonds through which NBFCs have already raised around Rs 270 billion between April and September 2018, against Rs 50 billion in the whole of fiscal 2018.
Consequently, the agency also expects credit growth to slow down in near to medium term.
Ajit Velonie, a director at the agency warned that though current delinquencies are not high due to stringent credit appraisals and risk-mitigating mechanisms, if the funding situation does not stabilise over a period of time, asset quality challenges could manifest among MBFCs.
For instance, there has been a spike in defaults in the loan against property segment moving from 1.9 to 2.7 per cent in the past two years.