Analysts say payment delays by Dewan Housing Finance
Corporation (DHFL) could once again expose the contagion risks in the debt market.
“This (DHFL) default could also accentuate contagion risk in the financial sector (in the backdrop of IL&FS’ default last year), leading to higher costs and the polarisation of funds to better-rated NBFCs
— those with liquid balance sheets will also be better off,” CLSA said in a recent note.
AAA-rated NBFCs are still doing okay in terms of fundraising from the bond market. In some cases, the spread between equivalent maturity government bonds and AAA-rated bonds has contracted 15-20 basis points, according to Harihar Krishnamurthy, head of treasury at First Rand Bank.
But that may not have extended to the entire NBFC segment, as investors remain circumspect.
“The present situation is both a sentiment issue as well as liquidity issue for investors, as mutual funds are getting lower inflows and have less funds to invest, and this has made them excessively cautious,” said Shameek Ray, head of debt capital market at ICICI Securities Primary Dealership. But Ray admits the situation is not that dire for better-rated NBFCs that are “consistently raising funds from the bond market” while others depend mainly on bank funding.
A tougher environment for NBFCs can have ramifications for other segments of the economy, analysts point out.
“This can have a rub-off effect on sectors with a higher dependence on NBFCs (like real estate, housing, auto and small and medium enterprises),” the CLSA note added.
Moreover, experts warn that liquidity crunch has cast doubts on some of the NBFCs’ ability to survive. “Just selling down assets to pay immediate liabilities will not bring in any growth. Some NBFCs would need stronger management with fresh capital. Otherwise, some could find it difficult to exist,” said a fund manager, requesting anonymity.
For now, NBFCs are mainly dependent on funding their operation from their own cash flows. They are trying to securatise their portfolio and sell it to banks. Banks have also widened their securitisation portfolio to accommodate NBFCs. For example, State Bank of India raised its target for buying securitised loans from NBFCs to Rs 45,000 crore from Rs 15,000 crore. Union Bank of India also doubled its target. However, most of these are securitised retail loans. In 2018-19, NBFCs and housing finance
companies securitised Rs 1.9 trillion of their retail loans, doubling from Rs 85,000 crore a year ago, according to Crisil.
The sale of assets is actually bad for NBFCs in the long run. While it ensures immediate survival, assets are the best quality that NBFCs hold. Since companies are not extending much of a loan due to liquidity squeeze, they are not getting new business. After the securitisation of good assets, the books could be left with duds, which are a future risk, pointed out an analyst.
Due to difficult conditions back home, some NBFCs are exploring the offshore markets. “We expect NBFCs to become more regular issuers in the offshore bond market as they seek to diversify their funding sources. If prudently managed, this should be credit positive as funding profiles are strengthened,” Fitch Ratings said in a recent report.
Recently, a few large NBFCs, not necessarily AAA rated, collectively raised about $2 billion worth of bonds. NBFCs, through their banks, promptly swapped the dollars for rupee. The RBI’s $10 billion swaps ensured that forward rates for three years crashed, and these NBFCs rushed in to cover their position. The dollar loans were raised in sync with the RBI’s dollar swap tenure of three years to take advantage of a cheaper forwards rate. The forwards rates had crashed below 3.50 per cent after the first such swap announcement in mid-March. The one-year forwards rate has inched up again to 4.11 per cent now, but it is still relatively cheap, considering one year forwards remains more or less at 5-5.5 per cent.
The RBI is unlikely to repeat a dollar swap but executives in NBFCs are expecting some kind of help from the central bank. “The RBI should help us directly by swapping any loans that we raise abroad, something that was done for banks,” said an official with an NBFC.
But market experts say that is unlikely to happen as any fundraising increases India’s external debt and if any NBFC defaults, it will not be good for any Indian company planning to raise funds abroad, irrespective of the rating.
The present situation, however, could turn around soon and NBFCs can hope to get back their mutual fund investors. “In a falling interest rate scenario, bank fixed deposit rates will go down and that will encourage investors to come back to mutual funds and markets. So, the situation will hopefully get restored to normalcy in some time,” Ray said.