NBFC sector moves to get over IL&FS crisis, PE/VC investments up 42%

One of the active investors in the sector is International Finance Corporation, the World Bank's investment arm

The collapse of Infrastructure Leasing and Financial Services (IL&FS) last year pulled down India’s shadow banking companies but investors have not abandoned in the sector, data shows.

Private equity (PE) and venture capital (VC) firms invested around $2.01 billion in Non-Banking Financial Companies (NBFC)—informally called shadow banks—in 2019 compared to $1.42 billion a year ago, up by 42 per cent.

According to Venture Intelligence data, investors since January have pumped in $2.01 billion across 33 deals. This compares to $1.42 billion across 37 deals in 2018 and $1.03 billion across 35 deals in 2017.

Blackstone's $385-million investment in Aadhar Housing Finance topped the list this year, followed by CDPQ's $250-million investment in ECL Finance; and $230 million investment by NIS New Investment Solution in DMI Finance.

The PE investment surge comes at a time when several listed NBFCs have seen significant erosion in their market value due to asset-liability mismatches, tight liquidity, and reduced ability to seek higher short-term borrowings.

Rajat Tandon, president of Indian Private Equity and Venture Capital Association (IVCA), said investors believe the IL&FS crisis led to correction in valuation and they see select NBFCs as good long-term bets.

"Since RBI (Reserve Bank of India) is tightening the regulations around the NBFC space, it will weed out a lot of bad apples. This is good for the sector in the long-term. RBI has cancelled registrations of 1851 NBFCs as of March 2019 and the number of NBFCs has dropped to lowest in last 10 years. Fundraising will remain a challenge as banks are still under pressure with the sector not performing well," he said.

According to Nomura, outstanding funding raised by NBFCs through banks and mutual funds rose just 9 per cent year-to-date in FY20 compared to a peak growth of 30 per cent in FY18. The NBFC sector growth may fall to 4.8 per cent in FY20.

One of the active investors in the sector is International Finance Corporation (IFC), the World Bank's investment arm.

Jun Zhang, IFC’s country head for India, said NBFCs lend to small businesses and for affordable housing and commercial vehicles – all critical parts of the economy. After the IL&FS crisis, banks were seen to be holding back funding to NBFCs.

Zhang said IFC has been focusing on NBFCs. In October 2018, it decided to launch a billion-dollar masala bonds issue, of which the first lot of $100 million was immediately subscribed. This, to an extent, helped calm the markets. It showed there were many investors willing to come to India and take the risks, particularly currency risks. In addition to the financial support, IFC also stepped up its advisory services to NBFCs.

"For our investments, we selected NBFCs with strong managements and good governance," he said.

Analyst expects more deals in the pipeline being announced in the coming months, as many funds believe the present time is an opportunity to acquire portfolios and assets at reasonable valuations. And, these funds are also bullish on the long-term scope and prospects of the NBFC sector.