Hunt for deposits won't move the needle for crisis-hit NBFCs, say analysts

They won't find it easy to move predictable lump sum money away from banks: Experts

As cheaper sources of funding dry up, non-banking financial companies (NBFCs) — after a hiatus — are once again aggressively tapping depositors for capital. Seen as a sticky and predictable source of money, NBFCs are vying with some of the leading banks to woo deposit holders (see table).

Yet, experts say it is going to be a long and tough journey before NBFCs can grow their deposits to a sizable scale. 

A report by Morgan Stanley notes that deposits, including fixed deposits or FDs, form 3 per cent of the borrowing mix, on an average, for NBFCs. 

From these levels there may not be more than 200–300 basis points (bps) increase in deposits, says Abhinesh Vijayaraj, banking analyst at Spark Capital. In fact, analysts are of the view that despite going all out to win deposit holders, this stream of funding may not be a game changer for NBFCs. Apprehension largely arises out of two factors — the structural changes that tight, short-term liquidity have brought to the NBFC sector and the reluctance of investors to move money out of banks for the 50–70 extra bps interest rate offered by NBFCs. 

“NBFCs are now forced to look at capital, with longer-term horizon such as term loans and FDs. This is a self-correcting exercise to firm up their asset-liability management,” says Asutosh Mishra of Ashiana Capital. 

But he warns that NBFCs may have to cede a portion of profitability to find success. Until now, NBFCs, which raised commercial papers or CPs for 6.8–7.8 per cent, will see cost escalating by 50-100 bps as they dip into FDs. 

“Consequently, return ratios and valuations, too, will take a knock,” Mishra warns. Vijayaraj questions the participation in these FDs. “Retail deposits may not move out of banks for some 50 bps of higher interest, offered by NBFCs.” Therefore, experts say higher FD rates may be appealing to institutional investors who don’t want to park surplus liquid funds. Wholesale money, though, isn’t known to be sticky.

In short, how NBFCs roll over their maturities in December will decide their preference for FDs. Trouble in re-pricing assets to match the rising cost of funds could alter profitability and growth of NBFCs, particularly housing financiers.