Rising stress among NBFCs sets the stage for a string of portfolio buyouts

I learn that many non-banking financial companies (NBFCs) are looking at an outright portfolio sale for funding,” says Jaspal Singh Bindra, executive chairman of the Centrum Group, adding: “With banks reluctant to lend, and particularly private banks near-absent, the financing options are limited.” The offers by Oaktree Capital, Adani Properties, S C Lowy and Piramal Enterprises last week either to pick up Dewan Housing Finance Corporation’s entire book for Rs 28,000 crore, or cherry-pick from it, are not being seen as a one-off.
 

The last time talks around portfolios picked up pace was in the aftermath of the global financial crisis in 2008 — the period saw CitiIndia Financial’s Rs 7,000-crore retail finance and GE Money’s Rs 3,000-crore mortgage books going into play. The last major portfolio buyout in the NBFC space was Centrum Group’s acquisition of L&T Finance’s Rs 800-crore supply-chain finance business in 2018. But, that again is no indicator of valuations going ahead, since the share of dud loans in that book was less than 1 per cent, and nearly half the exposure was to L&T’s dealers and suppliers.
 

“You will find portfolio buyouts, either through direct assignments or securitisation; there has been a fair degree of activity in this sphere with select state-run banks taking the lead,” says Vimal Bhandari, executive vice-chairman and chief executive officer (CEO) of ARKA Fincap.
 

Cherry-picking
 

According to CRISIL Ratings, NBFC loan delinquencies could shoot up 50-250 basis points in the current fiscal year, and this is a base-case estimate that does not factor in loan restructuring and the Covid-19 affliction curve.
 

Says Krishnan Sitaraman, senior director at the rating agency: “While there has been an improvement across segments over the past four months, collections in the wholesale, MSME (micro, medium and small enterprises) and unsecured segments are still much lower than before the pandemic.” This will have a bearing on the valuations of portfolios on offer.

 

Sunil Gulati, chairman of Merisis Advisors, adds that “all kinds of portfolios may be in play, as there is liquidity in the system. But there would be a preference for relatively well-performing and secured retail, or MSMEs as compared to larger-ticket wholesale portfolios.”
 

While the spotlight now is on NBFCs’ portfolios, it can straddle a variety of businesses, entities and geographies. It can range from the simple (HDFC’s Rs 60-crore buyout of Gruh Finance, the housing finance arm of Gujarat Ambuja Cement in the early 2000s; Gruh now resides in the belly of Bandhan Bank) to the geographical (Standard Chartered Bank’s buyout of ANZ Grindlays Bank’s India and West Asia operations for $1.3 billion in 2000).
 

It could even be a vertical: ABN AMRO Bank’s buyout of Bank of America’s (BankAm’s) retail book across India, Taiwan and Hong Kong for $200 million in 1999, after the latter’s merger with Nationsbank. If you are hard pressed on outreach, like HSBC in 2008, you pick an IL&FS Investsmart for $241 million. Of course, these transactions need not indicate where future interest will emerge from.

 

“The portfolio-buyout model helps you to jumpstart a business and gets you market share in an inorganic way,” notes Romesh Sobti, former managing director and CEO of IndusInd Bank. He was involved in three such deals — IndusInd’s purchase of the Indian credit card business of Deustche Bank in 2011 and ABN AMRO’s diamond and jewellery financing business in 2015. And still earlier, in the ABN AMRO-BankAm deal as the India country head of the Dutch bank — the first known instance of such a transaction in the financial services space.
 

The Reserve Bank of India’s Financial Stability Report (FSR) of July 2020 shows that at the end of April, 29 per cent of NBFCs’ customers and 49 per cent of their outstanding loans were under moratorium. Debt issuance in May 2020 was Rs 30,495 crore, with outflows (on account of maturing papers) at Rs 30,633 crore. Data for issuances in subsequent months could not have been captured in the FSR of July, as its finalisation was in the last lap. But outflows were projected at Rs 38,117 crore in June, Rs 22,243 crore in July, Rs 34,171 crore in August and Rs 18,750 crore in September.

 

Rising stress among NBFCs, and the difficulty faced by many of them in raising resources, may force the hand of several players. “Options like exiting a business segment, or focusing only on co-origination, or seeking formal partnerships (including consolidation with another player), are also being pursued,” points out Bhandari of ARKA Fincap.
 

NBFCs vs banks, after the moratorium
 

A view is gaining ground that non-banking financial companies may not be as affected as banks, post-moratorium. It is argued that banks’ lending business is concentrated in the top 10-15 cities, where the lockdown continued longer than in tier-2 to tier-5 locations (key geographies for NBFCs). Also, ticket-sizes for NBFC loans are lower than those of banks. If this argument is to hold, it is reasonable to assume that banks may not lap up NBFC portfolios, given the pressures on banks’ own loan books, unless they are truly outliers in terms of quality.
 

The securitisation route is also not firing. Transactions plunged 80 per cent, to just over Rs 20,000 crore in the first half of FY21. This is a far cry from the Rs 96,000 crore seen during the same period of FY20, and Rs 68,000 crore in FY19.