INSUBCONTINENT EXCLUSIVE:
PRATEEK AGARWALCIO, ASK Investment ManagersOver the past two months, there has been a big focus on NBFCs
If you ask whether there is a systemic risk to the system, I believe the peak period of renewal of commercial papers was in the first half
of November and that period has passed
The key period to watch for is when corporates pay taxes and liquidity reduces.
What steps are being taken to avoid repeat of the problemThe
problem has arisen because of asset liability mismatch
NBFCs borrow short term and lend longer term
This strategy works till the interest rate scenario is benign but hurts when rates start to climb
The problem has arisen because rating agencies have probably given more importance to the business house sponsoring the NBFC rather than the
business of NBFC itself.
• I believe in future rating agencies would give more importance to ALM.
• Leverage may have to be cut, that is
have higher equity/and or have some money kept with the regulator similar to CRR of banks
This is already being done for deposit taking NBFCs
This may be extended to all NBFCs.
What is the growth outlookThe growth outlook for NBFCs has become impaired due to several reasons.
•
Banks are more competitive in the market place as avenues of low-cost funds which allowed NBFCs to compete with banks have reduced
When mutual funds inflows were strong, it was possible for NBFCs to raise medium-term money at competitive rates and compete with banks on
an all-inclusive cost basis
Similarly, strong FII inflows into the debt market and the ECB market also allowed cheaper liquidity on a fully-hedged basis when the rupee
Cost of funds have increased
PSU banks are now more competitive than NBFCs for giving loans.
• PSU banks, with a large branch network, are competitors to NBFCs
However, they have not been aggressive on account of balance sheet issues
While this issue persists, on the margin things have improved
Banks are are now buying assets and increasing their market share.
I believe that banks would gain market share in this period.
Are NBFCs
good investmentsNBFCs increase the equity percentage in the total lending business
For example, if a bank lends directly to an entity, it would keep just say 10% of the loan amount as equity
However, if the bank lends to an NBFC and the NBFC lends to the entity, the overall equity backing the loan goes up because both entities --
the bank and NBFC --keep the requisite equity
To avoid recurrence of the NBFC problem, the best way would be to have them share on a continuous basis their ALM and having rating agencies
give a high weightage to ALM.
In case the regulators focus on ALM matching, except for HFCs and financiers of capex, other NBFCs which
finance micro loans, gold loans, two-wheeler loans, CV loans etc
These NBFCs have short duration loan books and have a good ALM match.
Since long term credit is not available in India, NBFCs which lend to
spaces such as housing finance and infrastructure finance may need to either provide more capital or maintain minimum liquidity
The overall scenario has not changed
PSU banks are still starved of capital
Many banks are under PCA and hence can’t expand their balance sheets.
Presently, banks lending to NBFCs have RWA of 100%
This induces banks to lend to entities which offer higher yields versus which are safer
It seems RBI is not in favour of banks sponsoring risk-bearing entities like insurance businesses or NBFCs
Such entities may have to be reorganised so that the risk on banking business itself is minimised.
Regulations would hence need to be
watched closely.
Least risky and best positioned would be NBFCs rated A- or above and focussed on segments like gold finance, micro finance,
twowheeler finance, consumer finance, and CV finance
These segments are higher yielding and shorter duration and permit ALM match
Some of these segments which qualify for priority sector lending have an advantage
With these segments as core, an NBFC could build a relatively smaller housing or infrastructure financing segment
However, infrastructure and housing would need to have longer term funding to be less risky.
In the near term, some slowdown in growth and
some compression in NIM should be expected
However, over the medium term, the growth prospects may change.
