NBFCs could sell non-core assets worth Rs 15,000 crore, says CLSA

Besides funding challenges, select firms face solvency risks

More non-banking financial companies ( NBFCs) could be forced to sell their non-core businesses as they grapple with funding challenges and solvency risks. Brokerage firm CLSA said NBFCs facing this double-whammy could off-load non-core assets worth Rs 15,000 crore-Rs 20,000 crore.

“NBFCs with higher leverage (asset-equity ratios of say more than eight-times), or those that have seen downgrades to credit ratings or are facing significant funding constraints from lenders, are likely to explore options for stake sales. Leverage at the promoter level and the pledge of stakes could also drive such sales," analysts at CLSA said in a note.

The analysts added that promoters of NBFCs, “may monetise stakes in businesses like life and general insurance and mutual funds, as well as niche lending platforms which may look to monetise these stakes.”

The liquidity situation of NBFCs is showing some signs of improvement with the share of NBFCs and housing finance companies (HFCs) in total corporate bond issuances rising to 87.4 per cent in January 2019 from 53.6 per cent in the previous month, said a note by CARE Ratings.  

However, equity analysts don't see much reason for cheer from the performance reported by NBFCs in the December quarter.

“Except for a few highly-rated and strong parent-backed NBFCs, most in the sector saw challenges in liquidity, cost of funds and also some ratings volatility. Several NBFCs need to re-align their borrowings to streamline their asset-liability profile. Most NBFCs face margin pressures, due to slower growth and higher funding costs,” analysts at Sharekhan said in a note.

Analysts said funding by mutual funds towards NBFCs is likely to remain muted.

“With new pressure points like loans against shares and corporate governance questions on some HFCs, risk-aversion by MFs in funding NBFCs/HFCs should continue,” analysts at Nomura said in a recent note.

The analysts added that MFs’ exposure to NBFCs and HFCs has declined from the peak of 42 per cent of the debt AUM in September last year to 35 per cent in January, 2019.

With the above decline in AUM exposure translating into a contraction of Rs 90,000 crore, this has opened up a large liquidity gap for NBFCs.

Bank credit -- another important avenue for funding for NBFCs -- has also seen a sharp drop in recent months.

According to the CARE Ratings note, the share of NBFCs in incremental bank credit has declined from 63.5 per cent in October to 6.5 per cent in December.