Growth and margin compression ahead for NBFCs and HFCs, say experts

From left: Multiples Alternate Asset Management Founder and CEO Renuka Ramnath, Indiabulls Housing Finance Vice Chairman, MD and CEO Gagan Banga, Former Reserve Bank of India Deputy Governor S S Mundra, and Centrum Group Chairman Jaspal Bindra
Over the past 10 years, non-banking financial companies (NBFCs) and housing finance companies (HFCs) have grown from being specialist financiers to companies grabbing market share from banks, especially the state-owned ones, in the wake of various issues plaguing the banking sector. However, some of that success came undone recently in the wake of the defaults by Infrastructure Leasing & Financial Services (IL&FS). Top experts discuss the way ahead for NBFCs.                           

What do you think about the present situation facing NBFCs? 

Gagan Banga: There is undoubtedly a crisis. Any financial services company should build its business with the realisation that it will go through a liquidity crisis every three to five years, for one reason or the other. This is the fourth crisis in the last 10 years, and the reason and the trigger every time is different. 

S S Mundra: “There could be irrational exuberance as well as irrational pessimism playing out in the markets. This fear around NBFCs today has not come as a sudden revelation. All the parameters of how NBFCs were operating was available and I think analysts also didn't realise the problem then. 

How did this situation arise despite ample financial data on all NBFC activities? 

Renuka Ramnath: As an investor for over two decades there is no such thing as easy money in any business. With the proliferation of NBFCs in recent years there have been many amateurs who think that there is easy money to be made.

Jaspal Bindra: Each NBFC has a business model and a financing model and people are confusing the two. You can have a great business model and a short-sighted financing model, or the opposite. No financial company be it a bank or an NBFC will ever make enough profits to finance itself, it will always need refinancing. Therefore, the issue is managing the financing model. 

Can NBFCs continue to play the important role they have been playing so far? 

Banga: Not all banks are the same and not all NBFCs are the same. You will have to differentiate between them. There may be some players who are ill-disciplined but the larger part of the universe is doing productive work. Four years ago I was faced with a similar situation where people said loans against property (LAP) is a bad word, so I got grading exercises done for all LAPs above Rs 6-7 million and we put that [information] out. We also engaged with banks and regularly securitise our loans. We should look at these things more positively.

Ramnath: I still look at NBFCs as a big opportunity, and they are a great necessity for the country. If we are to become a $6 trillion economy in 10 to 12 years it would mean we need more than $4 trillion of incremental credit growth. This cannot come from the public banks it will have to come from the private sector. 

The sector is under pressure right now, but there has been some improvements in the short-term debt markets. Where do we go from here? 

Bindra: I do not think we should paint all NBFCs with the same brush but in such situations everyone will be exposed to the problem by varying degrees. It is fair to assume that when a sector goes through a lean period, everyone involved in the sector will suffer. We've seen it happen in steel because steel went through a long cycle of low [global] prices than ever before, we are seeing it in power and in gold and jewellery. 

Mundra: There will be some positive outcomes. There could be some consolidation and casualties also. On the regulation side going forward there could be changes which may entail some tweaking on the asset-liability management and liquidity side and also some entry barriers. The industry should prepare for growth compression and margin compression for the short-term.

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