The numbers exclude Housing Development & Finance
Corporation (HDFC) and Bajaj Finance, the two largest non-bank lenders in the industry. Both companies reported debt to equity ratio of 3.9x on average during FY18. Including their numbers, industry leverage ratio declines to a respectable 4.9x last fiscal year, lowest in eight years.
raised around Rs 125 billion in fresh equity last fiscal year, while Bajaj Finance
raised around Rs 45 billion, making them greatly immune to current turmoil in the bond market.
The analysis is based on the historical financials of 23 listed retail non-banking finance
companies (NBFCs) that are part of BSE 500 index. Some of the prominent NBFCs
in the sample include HDFC, Bajaj Finance, LIC Housing Finance, GIC Housing, Indiabulls Housing, PNB Housing, and Can Fin Homes.
“Liquidity situation was quite benign till a few months back and there was a good appetite for retail NBFC paper, especially from mutual funds. Given this, lenders had no qualm about stretching their balance sheet, and continue to grow faster,” says Dhananjay Sinha, head research at Emkay Global Financial Services.
Analysts also say that equity raising entails equity dilution, which is frowned upon by existing equity investors as its dilutes the companies' future earnings per share and dividend per share (if any).
For example, incremental equity capital, including retained earnings, accounted for only 10 per cent of the industry’s incremental assets growth in the last three years (between FY15 and FY18). In contrast, incremental borrowings, including deposits, accounted for nearly three-fourths of the industry’s incremental loan growth.
Experts are raising doubt about the industry ability to maintain their pace of growth through reliance on the debt market. “Wholesale funding is now an issue for NBFCs
due to tighter liquidity and steady rise in interest rates. Non-bank lenders will now have to either take a hit on loan book growth or raise fresh equity to continue grow their business,” says Karthik Srinivasan, head of financial sector ratings ICRA.
According to him, the funding requirement is the biggest for housing finance companies (HFCs) that have some of the highest debt to equity ratio in the industry. “Regulation allows HFCs to leverage their equity by up to 16 times, but higher leverage means greater dependence on money and bond market that has become risky in current environment,” says Karthik.
are facing repricing where fresh funding is coming at a much higher interest rates. "This is squeezing the margins for NBFCs and the impact is greatest for those with lower capitalisation,” says Dhananjay.
Capitalisation is the share of equity or net worth in a lender's total assets. The ratio was 12.1 per cent for our sample on average last fiscal year, lowest in a decade.
Analysts also say it won't be easy for companies to raise fresh equity capital given the recent sell-off in the sector. “Retail NBFCs were sought after by equity investors till few months back due to high double digit growth reported by them. The cycle has now reversed and NBFCs are going through derating (cut in earnings multiple) and will require lot of convincing for companies to raise fresh capital in the current environment,” says Dhananjay.
says either way most NBFCs will have to slow down their loan growth and some of the most leveraged such as Dewan Housing will have to sell a part of their assets (or loan book) to banks to raise incremental capital.
Others may have to knock on the door of their deep-pocketed parents such as Life Insurance Corporation, GIC or HDFC
for fresh capital.