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‘Claims about distress exaggerated’
Non-banking financial companies (NBFCs) are in the news following the IL&FS fiasco. The fall from grace for the giant has shaken up India’s financial markets.
“The secular upswing enjoyed by NBFCs over the past five years has come to a sudden halt — bond markets are in a tizzy, interest rates have firmed up, asset-liability mismatch is the only point being discussed and business models are being questioned,” said Antique Stock Broking Ltd. in a recent report.
Excesses in NBFC space
While there have been excesses in the space, it wrote, the NBFC space is heterogeneous where there are some extraordinary business models, some mediocre ones and some vulnerable spots, it wrote in the report. Even after 25 years of private banking, retail credit penetration in India is low, with roughly about 10% of the population having access to banking credit, Antique said in the analysis. NBFCs currently serve 60 million people through gold, micro, MSME, two-wheeler and commercial vehicle loans and have more than 50% market share in each of these segments. Based on the type of products and the category of customers serviced, there is a wide spectrum of NBFCs. A large part of the NBFC ecosystem services the retail population directly where the assets financed are liquid, repayments are regular and pricing power reasonable. The other part of the NBFC universe helps fill gaps left by PSU bank ‘hibernation’ and this is where the maximum risk lay. Asset liability mismatches arise because of two reasons — either being too reliant on short-term borrowings or illiquidity in the underlying asset being financed. Most new-age NBFCs and some housing finance companies (HFCs) having large exposure to developers and large-ticket loans against property, face the most critical challenge. For them, both growth and margins will slow down. Post the recent IL&FS fiasco, the risk arose that some financial entities would have issues rolling over their maturing obligations. “However, that this liquidity constraint will cascade into distress for NBFCs is probably exaggerated, though steps need to be taken in order to safeguard financial firms’ own balancesheets as well as overall financial stability, since we are going to be in a tighter liquidity [situation] and higher rate environment going forward. That will exert pressure on the margins of these NBFCs,” said Arun Thukral, MD & CEO, Axis Securities. Bright spots are segments that service retail customers, have good pricing power, are difficult for banks to disrupt and see good recovery in demand. Vehicle finance, consumer finance, MSME and micro banking are likely to remain bright spots over FY19 and beyond.
Source : https://www.thehindu.com/todays-paper/tp-business/nbfc-storm-will-let-up-sooner-or-later/article25222723.ece
