NBFCs: Equipment demand more positive than relaxed ECB rules

Relaxation of ECB norms is a booster, but benefits will largely be offset by costs of hedging loans

The RBI (Reserve Bank of India) on Wednesday relaxed its norms on external commercial borrowing (ECB, or foreign-currency loans) for non-banking financial companies or NBFCs — restricted to infrastructure and asset financing. These NBFCs will now be allowed to raise ECB with a minimum average maturity period of five years (versus 10 years and above earlier).

On Thursday, the Sensex ended flat, but Srei Infrastructure Finance, Sundaram Finance, Cholamandalam Investments and Finance, and M&M Finance gained two-four per cent. Shriram Transport Finance was up 0.5 per cent but Magma Fincorp ended 0.7 per cent lower after euphoria. Others like L&T Finance (up 0.4 per cent) too stand to benefit, but given their larger portfolios, the gains are not likely to be sizeable.

Experts say these NBFCs have to fully hedge their ECB exposure, hence, hedging costs will offset a large part of the gains from cheaper foreign-currency loans (ECBs).

Abhinesh Vijayraj of Spark Capital says when lending rates (including hedging costs of five percentage points) through ECB are 8.5-nine per cent, it does not add value when domestic funds are available at 9.5 per cent. Though other experts share Vijayraj’s view, they point out the easing of norms coincides with a recovery in demand for commercial and construction equipment (CE). This is a bigger positive.

  From 10-15 per cent exposure to high-yielding CE business four years ago, the share of lending to CE is now five-seven per cent. But this is changing. A report by Macquarie says in the past six months and particularly since the start of 2016, there has been a turnaround, with strong volume growth in demand for CE.

Another positive the report hints at is that purchases are primarily proposed by first-time buyers, which indicates a turnaround in economic activities has percolated to the lower segments. This demand is driven by a pick-up in government expenditure, particularly in the roads, railways, and mining segments. Macquarie’s report suggests Andhra Pradesh, Telangana, Jharkhand, Uttar Pradesh, Karnataka, Tamil Nadu and Odisha are driving this demand or states where major CE lenders such as Magma, Sundaram, Shriram, and Srei have presence. The gains for infrastructure (project) financiers will largely be from higher demand for credit. The stock performances of Magma, Srei, and Sundaram Finance have been dismal year-to-date, while Cholamandalam and Shriram have done better. The trend could improve if the turnaround of CE picks up and starts reflecting in their financials.