Moratorium-linked uncertainty puts debt mutual funds in jeopardy

According to Sebi data, MFs had Rs 1.38 trillion debt exposure to NBFCs, of which Rs 51,014 crore was in less than 90-day debt papers, as of March 31, 2020

The moratorium-linked uncertainty over non-banking financial companies (NBFCs) could lead to credit events or rating action on exposures of debt mutual funds (MFs), which hold Rs 51,014 crore of bond exposures to NBFCs in near-term maturities.

According to the data from the Securities and Exchange Board of India (Sebi), MFs had Rs 1.38 trillion debt exposure to NBFCs, of which Rs 51,014 crore was in less than 90-day debt papers, as of March 31, 2020.

“Larger-sized NBFCs, with strong parentage, will be able to tide over the liquidity crunch despite lack of moratorium from banks. However, mid- and small-sized NBFCs can face immediate challenges in their asset-liability profile,” said a debt fund manager.

Data from primemfdatabase.com, showed that corporate bond funds had about Rs 30,000 crore of exposure to NBFCs in March. The data excluded government-backed NBFCs such as REC and Power Finance Corporation.
 

While banks are showing reluctance in giving moratorium to NBFCs, the former have also expressed concerns on using targeted long-term repo operation  (TLTRO) facility to extend liquidity to NBFCs. According to certain banks, giving capital to NBFCs to repay the loans would not be a prudent move.
 

“Banks are not taking decisions on giving moratorium to NBFCs, citing lack of clarity from the Reserve Bank of India. Amid this limbo, select larger-sized NBFCs would be able to raise funds at higher yields, while those lower on the credit curve could face imminent liquidity risks,” another fund manager added.

 

Market participants said if there was no progress on the situation between banks and the regulator, even larger NBFCs were likely to face liquidity crunch over next two-three months. Further, payment delays by NBFCs could delay receipt of planned withdrawals for investors in closed-end funds such as fixed maturity plans (FMPs). “FMP investors commit funds with a certain time horizon and seek to take out their funds at the time of maturity,” said a debt fund manager.

According to a recent analysis by Crisil, NBFCs had Rs 1.75 trillion worth of debt maturing by June.
 

Sources suggested MFs were also seeking relaxation in valuation norms from Sebi. “While Sebi had allowed rating agencies to avoid giving default or ‘D’ grade in case of a default, valuations could still be adjusted to factor in the default risks. Such changes in valuations could trigger 40-70 per cent markdown on exposures, impacting net asset values of schemes, and triggering redemption pressures,” said a senior executive of a fund house.

Industry executives said Sebi could consider allowing MFs to side-pocket NBFC exposures, which were unable to service corporate bond obligations due to RBI’s direction to extend moratorium to their borrowers that were facing a cash crunch.

Experts said lack of moratorium to NBFCs from banks, could put asset finance companies (AFCs) such as commercial vehicle financiers and micro-finance lenders at higher risks.

“Overall impact of deferment would be more visible on AFCs than housing finance companies since recoveries are better among large-ticket secured loans,” Emkay Global Financial Services said in a note. "NBFCs with weaker borrower profile such as small and medium enterprises or micro-finance loans are among the most vulnerable," said another analyst.