NBFCs face tough times, struggle with funds as banks turn risk-averse

The ratings downgrade of Reliance Capital has put the spotlight back on private non-banking financial company (NBFC) sector, which seemed to have just started recovering from a liquidity crisis triggered by the IL&FS defaults last year.
 
The stocks of large NBFCs have fallen in the last one year substantially, even as funding cost shot up. NBFCs, which accounted for nearly 70 per cent of the corporate debt market in India, seem to be struggling in tapping the market now.
 
This would mean that NBFCs, even if they survive the hit, would have to scale down their growth plans, say analysts. At a time when even banks are scaling down on lending, NBFCs are actively trying to tap overseas markets for funds. The Reserve Bank of India (RBI), however, has made it easier for them to lower borrowing cost through cheaper hedging cost.
 
Nevertheless, it is getting tough for even better-rated NBFCs to raise money. The best-rated NBFCs have to shell out 40-50 basis points above the AAA corporate bonds. This may not seem high at first glance, but when one considers that even AAA-rated corporate bonds are paying about 100-110 basis points above the government bonds, the real impact on NBFCs become apparent.
 

The worst affected among these are housing finance companies. PNB Housing Finance, which saw its stock plummet nearly 50 per cent in a year, was put on watch by CARE Ratings on Tuesday as corporate loan exposure increased in the company at a time when real estate is facing weakness.
 
Among major NBFCs, PNB Housing has the least dated bonds in its books, but it is pretty active in the commercial papers and the external commercial borrowings (ECB) markets.
 
Other home finance companies are also facing the heat. According to Credit Suisse, despite the overall liquidity situation easing with the RBI’s record liquidity infusion and repo rate cuts aiding yields, “domestic wholesale debt markets appear to be differentiating among the NBFCs.”

 
Among 17 large NBFC and HFC groups analysed by the brokerage, the overall quantum of bond issuances picked up in February and March, but the largest mortgager HDFC Ltd and quasi-government LIC Housing Finance accounted for about 60 per cent of bond issuances in these two months, Credit Suisse said.
 
"With doubts being raised over the asset quality of PNB Housing, it casts concerns over the entire sector. So far the industry has been quite resilient to asset quality pressures, but there is a sense of risk aversion towards NBFC sticks lately, particularly those with exposure to loan against property and commercial vehicles," says Siddharth Purohit of SMC Global.
 
Banks are also getting risk-averse in lending to the NBFC sector, and this would mean that the companies have a limited avenue to explore for fundraising.
 
"Banks, which are an important source of funds, are expected to slow down their lending to NBFCs and this could put further pressure on to the cost of funds which is already on the rise for across the system, irrespective of whether they are promoter-backed or not," says an analyst from a foreign brokerage.
 

Masala bonds are one of the few limited options left to these troubled companies.  “With major central banks globally turning dovish, NBFCs/HFCs have resorted to ECBs and masala bonds to compensate for a decline in domestic private issuances,” Credit Suisse noted.
 
The RBI’s recent $10 billion swap with banks lowered the hedging cost by at least 200 basis points for three-year money. This has reduced the all-in cost, the brokerage noted.
 
But the market is getting difficult even for AAA-rated firms. Sundaram Finance Ltd on April 26 raised Rs 500 crore in two-year bonds at 8.41 per cent. The government bond yield for a two-year bond is now at 6.72 per cent. This means the spread was over 165 basis points. In normal times, the spread would not have widened beyond 100 basis points over Gsecs.
 
At the same time, NTPC will be borrowing Rs 3,056.50 crore for three years at 7.93 per cent on Friday. The pricing for this transaction was fixed on Tuesday. The spread over government bonds works out to be little more than 90 basis points over equivalent maturity government bonds.
 
“There is money in the market, but investors are now preferring PSU companies over private firms,” said a senior bond arranger.
Sure enough, the quasi-government companies have increased their borrowing from the market. According to market sources, government-backed entities have raised Rs 8,794.6 crore in April, whereas in April last year, less than Rs 1,000 was raised from the market.
 
However, state-backed entities seem to be not in favour. In April, three power utility companies, from Jodhpur, Jaipur and Ajmer, of the Rajasthan government had to withdraw from the market owing to high-interest cost, said market sources.