New sectoral caps to hit NBFCs, says Kotak Institutional Equities

MFs exposure to non-banks (including PFC and REC) has declined to 36% in May 2019 from 39% in Sept 2018

Market regulator the Securities and Exchange Board of India has reduced the sectoral caps for debt mutual funds to 20 per cent from 25 per cent. It has also reduced the additional exposure limit allowed in case of housing finance companies (HFCs) to 10 per cent from 15 per cent. These changes, however, may not have an immediate impact for the mutual fund industry but will “significantly reduce the financial flexibility” of non-banking finance companies (NBFCs), says Kotak Institutional Equities.

MFs exposure to non-banks (including PFC and REC) has declined to 36 per cent in May 2019 from 39 per cent in September 2018. Excluding PFC and REC, the ratio was 28 per cent in May 2019, in line with the new effective cap of 30 per cent. Within this, the exposure to NBFCs was 18 per cent and HFCs was marginally higher than the new cap at 11 per cent,” says a note by the brokeage.

“NBFCs make concerted efforts to diversify funding avenues from banks to mutual funds, insurance companies, foreign borrowings, retail bonds in order to optimize funding costs as well as reduce dependence on any single source. The new regulations will structure reduce the leeway for NBFCs especially in the backdrop of the recent Sebi regulation that prescribed large borrowers to raise 25 per cent of incremental borrowings from bond markets from FY2022,” the note added.