NBFCs tap non-conventional sources, tweak business models for funds

Top housing finance companies (HFCs) and non-banking finance companies (NBFCs) have taken new routes for funding and tweaked business models in a bid to overcome the liquidity crisis.  

This comes after monetary issues, stemming from asset-liability mismatch, were taken up nearly two months ago.

NBFCs and HFCs, experts said, over borrowed from the short-term debt market, mainly through commercial paper (CP) issuances, and lent for longer terms like home loans of 8 to 15 years maturity, which led to the mismatch.

Some of these new routes include tapping bank lines, asset monetisation, securitisation and raising finances through external commercial borrowings (ECBs) in the face of a liquidity crunch in the economy.

An Icra report states that securitisation volumes soared to Rs 180 billion in October alone, with many entities raising funds through retail portfolio sell-down to banks. This helped NBFCs meet sizeable repayment obligations (around Rs 780 billion of CPs) due for repayment at the end of October.

Out of the Rs 180 billion raised through securitisation in October, 75 per cent has been raised by HFCs, with the balance being mopped up by NBFCs, small finance banks and micro-finance institutions. 

Vibhor Mittal, group head of Structured Finance at ICRA, said, “The advantage of securitisation transactions – especially in the current market scenario – is that investors are not exposed to entity-level credit risk and take exposure to the underlying pool of retail borrowers to whom these entities have lent. However, yields have gone up significantly (by around 100-200 basis points in October 2018 compared to H1 FY19), as market dynamics have changed completely – from being a sellers’ market earlier to becoming a buyers’ market now.”  

“Securitisation will continue to be a good option of liquidity for originators like us who have liquid and sought-after retail assets. Even if there is demand, we do not want to issue more CPs and would hope to borrow from banks in a sporadic manner. Essentially, the strategy is to starve traditional lenders by not giving them much of the paper while positioning ourselves as having many funds to raise money from,” said Ashwini Hooda, deputy managing director at Indiabulls Housing Finance Limited (IBHFL).

In the first half of FY19, IBHFL securitised Rs 50 billion worth of loans, followed by Rs 30 billion in October and plans to see Rs 10 billion securitised for November.

Hooda said IBHFL will sell Rs 100 billion worth of loans in its portfolio through securitisation in the third-quarter of FY2019.

On October 20, the Reserve Bank of India (RBI) permitted commercial banks to raise their exposure to a single (non-infrastructure) NBFC to 15 per cent of the bank’s capital from 10 per cent, freeing up funds for big NBFCs and HFCs.

Banks have an exposure of over Rs 6 trillion to the NBFC sector and RBI’s relaxation translates into Rs 500 billion headroom for NBFC lending, noted Ashish Gupta, analyst at Credit Suisse.

IBHFL is in the process of raising $250 million in ECBs in the coming months, while $150 million has already been raised. PNB Housing Finance also tapped the ECB route recently, raising over $200 million. Further, IBHFL sold large corporate assets to two foreign banks and sought refinance from the National Bank for Agriculture and Rural Development for its business requirements.

In its course correction after the liquidity crisis, LIC Housing Finance (LICHFC) stopped lending to projects with rating below ‘A’ grade. It has rejects loan proposals worth Rs 30 billion which are low grade developer loans were five per cent of outstandings portfolio of Rs 1.68 trillion at end of September 2018.

“After September 2018, HFCs are taking adequate precautions and will become stricter in appraising projects. That is the only change but we are not saying no to builder loans still,” said LICHFCs’ managing director and chief executive Vinay Shah.

Mahesh Thakkar, director-general at Finance Industry Development Council (FIDC) told Business Standard, “Before crisis hit the industry, companies were focusing more on asset-side growth. Now, there is clear realisation that liability side (liquidity) has to be taken seriously. In the last 15 days, the situation has improved in terms of resource availability.”

“The growth, which was in excess or 25 per cent year-on–year for the last four years, will moderate to around 15 per cent. Default by one entity has put the entire industry into reverse gear,” he said.

Dewan Housing Finance Limited (DHFL), in a statement to the stock exchanges in September, said that it would reduce CP outstanding from Rs 22 billion to Rs 1 billion by the end of March 2019.

As DHFL’s CP exposure is reduced over the next 6 to 7 months, borrowings from banks are projected to increase from Rs 6.83 billion as of September 2018 to Rs 10 billion by end of March 2019.

“There has to be seriousness about asset liability management and governance standards. We should not be guided by short term considerations,” Thakkar said.

 

Money matters
 

• Non-bank financiers' raise Rs 180 bn via securitisation volumes in October
• Securitisation volumes soared to Rs 180 bn in the month of October alone
• RBI’s relaxation on single-entity exposure translates to Rs 500 bn headroom for NBFC lending
• Some HFCs stopped lending to B-rated corporates, while others focus on top-quality developers
• NBFCs-HFCs look to ECBs, while Commercial Paper exposure is reduced over the coming quarters